Eddington's recovery warning knocks BA shares

Rod Eddington, the chief executive of British Airways, punctured the new-found mood of optimism surrounding the airline sector yesterday by warning that recovery was still some way off.

Mr Eddington also cautioned that BA's own yields and ability to fill seats would remain soft in the face of challenging market conditions and passenger resistance to price increases.

His comments, delivered at a UBS transport conference in London, helped send BA shares 5 per cent lower, reducing further the airline's chances of rejoining the FTSE-100 when the blue-chip index is recalculated after close of trading tonight.

BA shares ended the day 10p lower at 190.25p, valuing the airline at £2.06bn. Yell, the Yellow Pages directory business which is battling for the place in the FTSE100 due to be vacated by Kelda, closed virtually unchanged at 313p, valuing it at £2.18bn.

Mr Eddington told the conference: "Much has been said in the last few weeks about how things are getting better. Those outside the industry might even believe that times are good. I do not share that view. I believe real recovery is still some way off."

The BA chief cautioned that it would require "a sustained period of uneventful air travel and economic recovery before we talk of really turning the corner".

Mr Eddington went on to remind his audience that business class travel between the UK and the US was still 20 per cent below the level of three years ago, while yields on long-haul travel overall were below those reached in the quarter immediately following the terrorist attacks on the twin towers in September 2001.

He said it was unclear whether the improved traffic levels seen in recent months were the result of "pent-up" demand from cancelled and delayed travel plans or evidence of a more sustained long-term recovery in air travel.

Despite very little growth in capacity, yields remained weak and demand remained sensitive to prices, with passenger numbers dipping each time airlines tried to raise fares. Mr Eddington said that while there might be the first tentative signs of recovery in long-haul air travel in the aftermath of economic slowdown, Sars, war in Iraq and the terrorist threat, the short-haul premium market continued to decline and would not experience long-term recovery.

His comments were seen as a clear indication that BA would continue the efficiency drive which has seen its operating costs cut by £1.7bn over the last two years. BA is on course to achieve 13,000 job cuts by next month and has set itself a fresh target of reducing costs by £450m in the two years up to March 2005.

Mr Eddington also took the opportunity to reinforce the case for a third runway at Heathrow airport, saying it was "vital" to BA's future. The Government is due to announce a decision on new runway capacity before the end of the year and Mr Eddington urged the Transport Secretary, Alistair Darling, who speaks at the conference today, to make a "swift decision and the right one".