Pension woes take shine off bumper BA profits

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British Airways warned yesterday that staff costs would rise this year because of the £2.1bn deficit in its main pension scheme, overshadowing a strong set of first-quarter results with profits up by more than a half.

Willie Walsh, the airline's chief executive, also indicated that BA was likely to agree to increase the £500m cash injection it has offered to make to close the deficit in the fund.

The trustees to the main New Airways Pension Fund have said that the proposed injection will not be enough, although they have also accepted that BA's current level of contributions is not sustainable and that future benefits will have to be less generous. "I am not unhappy with what the trustees have said but we will have to sit down and negotiate with them," said Mr Walsh.

A new actuarial valuation of the pension scheme is due to be released next month and is expected to show that the deficit has grown from £928m at the end of 2003 to between £1.5bn and £1.8bn.

Employee costs rose 7 per cent in the April to June quarter as a result of increased pension costs and are expected to be slightly higher for the year as a whole, BA having forecast that they would be flat.

Despite this, pre-tax profits rose 57 per cent to £195m while operating profits were 20 per cent higher at £211m, giving BA an operating margin of 9.1 per cent.

Mr Walsh has set a goal of achieving a 10 per cent margin in 2007-08. BA shares fell by almost 4 per cent on the costs warning.

The rise in profits was achieved on the back of a 12.5 per cent increase in revenues to £2.3bn and a record load factors with BA's planes flying 78 per cent full. Martin Broughton, the BA chairman, cautioned that this level of income growth would not be sustained for the year. However, he said that BA had raised its forecast of revenue growth from 5-6 per cent to 6-7 per cent.

Fuel costs are now expected to be £550m to £600m higher for the year - slightly lower than BA had initially forecast because of the weaker dollar - and Mr Walsh said the airline had no plans to raise its fuel surcharge again.

The airline is being investigated by the Office of fair Trading and US Justice Department for alleged price-fixing of fuel surcharges on long-haul routes. BA made severance payments totalling £29m to managers during the period. It is planning to axe 600 managers, including half its senior management, by 2008 and Mr Walsh said the programme was on course. He said BA's new low-fares initiative on short-haul routes had been a big success, although competition in this sector was "brutal".

easyJet may franchise brand to Saudi start-up airline

The no-frills airline easyJet is considering franchising out its brand to the Middle East after receiving an approach from a start-up airline in Saudi Arabia. The Jeddah-based National Air Services, backed by the Dubai-based private equity firm Abraaj Capital, has applied for a licence to start operating flights within the kingdom under the easyJet banner. It plans to expand later to other destinations within the Gulf region. Easyjet said it was evaluating the proposal which would not involve it investing any equity or cash and which would need to deliver "significant shareholder value". The airline said it was unlikely to decide whether to go ahead with the franchising arrangement until early next year.