British Airways plummets to £401m loss as fuel costs soar

Airline to renegotiate contracts with suppliers / Jobs will be lost and jets grounded to reduce costs

British Airways dived to its worst loss since it was privatisated in 1987 as higher fuel costs and the weakening pound added to the problems of a collapse in premium-class travel.

After raking in a record profit of £922m last year, BA slid to pre-tax a loss of £401m in the year to March and chose to cancel its dividend yesterday. Willie Walsh, the chief executive, blamed dire economic conditions that he predicted would last for another two years at least.

"We are a global airline operating in more than 100 countries, and when we look at our network it is clear the weak environment is just about everywhere," he said. "There are no signs of any recovery whatsoever at this point, and any that we do see will be slow."

BA's performance was hit particularly hard in the fourth quarter as the recession took hold. Revenues were down 8.4 per cent year on year, leaving an operating loss of £309m. The airline said it was buffeted by exceptional circumstances during the financial year.

Sky-high oil prices added £1bn to BA's fuel costs, taking the annual bill to £3bn, and the collapse of sterling against the dollar shaved another £180m off the bottom line. Both are expected to cause fewer problems this year, as the pound shows tentative signs of strengthening and cheaper oil leaves the fuel bill forecast to come in £400m lower.

But the big problem is the slump in business-class and first-class airline travel. Sales of BA's premium seats fell by a whopping 15 per cent in March and April this year, while the number of non-premium passengers was down by less than 1 per cent.

The airline has already committed to making cutbacks totalling £220m this year, but Mr Walsh said it would have to go considerably further. BA is talking to its 250 major suppliers – including airports, telecoms providers and caterers – in the hope of bringing down the £4.5bn combined annual bill.

"The economic environment has changed and our suppliers have to recognise that this is a much tougher situation than we had expected," Mr Walsh added. "We are asking our suppliers to respond in the same way that people are looking to us to reduce our prices."

More staff will also have to be shed, although the company will not yet make any suggestion of numbers. Some 2,500 jobs have been cut since August, although none were compulsory lay-offs. BA's voluntary redundancy scheme is being extended, staff can opt for part-time work or unpaid leave, and both Mr Walsh and his finance director, Keith Williams, are forgoing their pay for July – a combined total of almost £100,000.

BA also announced that it would be making further dramatic cuts in capacity. In addition to offering 2.5 per cent fewer seats this summer, it will cut 4 per cent of capacity on its 2009 winter timetable, on top of last year's 3.5 per cent – taking the total down nearly 10 per cent from forecasts. In practice, it means 16 aircraft will be grounded from October and there will be fewer flights on some routes.

The company says the economy is too volatile to offer guidance on either the current financial year, or even the first quarter, which concludes next month. But analysts are predicting more major losses.

Gert Zonneveld, an analyst at Panmure Gordon, said last night: "BA can try to cut costs and improve efficiency but it can't cut as fast as it is losing revenues and that situation is remaining very difficult in the coming year. It is pulling all the levers, but it may not be enough."

Merger talks with Iberia are still in progress but are less of a priority as both companies struggle with the parlous state of the airline industry.