Fears over inflation-busting BA pay deal

Concern may be mounting at the Bank of England after British Airways yesterday agreed to an inflation-busting pay rise for its cabin crew to avert a damaging series of strikes.

BA has agreed a new two-year pay deal which will see wages for its 15,000 cabin crew rise by 4.6 per cent in the first year. This is above both the 2 per cent CPI inflation figure targeted by the Bank, and the RPI measure of inflation, which currently stands at 4.4 per cent. It is also above the 4.5 per cent "pain threshold" for pay settlements which the Bank regards as consistent with hitting its inflation target.

In a speech last week the Governor of the Bank, Mervyn King, warned pay negotiators against seeking "self-defeating" wage increases. He said this would only lead to higher prices and higher interest rates to counter the inflationary effect.

In the City, dealers greeted the deal to avert strike action with relief. BA shares closed almost 3 per cent higher, climbing 14.5p to 542p. The deal will see pay rise by inflation (4.4 per cent) plus 0.2 per cent from 1 February, and by the rate of inflation in year two. In addition, BA has agreed to four new non-pensionable increments which will lift basic salary for cabin crew at the top of the scale by nearly £3,000 to £18,600. Tony Woodley, general secretary of the Transport and General Workers union, said the new deal would increase pensionable pay by 18.75 per cent in some cases.

A BA spokesman pointed out that although the first year increase was above the RPI inflation rate, it would not be backdated to October last year, when the previous pay agreement ran out.

BA now plans to operate a full schedule today and tomorrow from Heathrow and Gatwick. But many passengers booked on those flights will already have switched to other carriers. Bmi said it was sticking with plans to add 3,000 seats to Manchester and Scotland this week.

BA is likely to give more details of the financial impact of the threatened strike when it unveils its third-quarter figures on Friday.