Walsh warns of need for further swingeing cuts at British Airways

The bulk of the savings will come from staff costs, by reducing the terms of employee pensions and significant redundancies.

Announcing better-than-expected quarterly results yesterday, BA's new chief executive Willie Walsh pointed to an agreement that BA has just reached with the bus drivers it employs to take passengers to and from planes. The deal saw the loss of 25 per cent of the 400 drivers employed at Heathrow.

"That was a very good indication of the extent of the changes that people are prepared to accept ... there is an acceptance that working practices need to be reformed before the move to Terminal 5," Mr Walsh said.

He said "we have done as much as we can" in other areas of BA's cost base. Staff costs are rising by 8 per cent a year and labour makes up 29 per cent of the company's total costs. It employs 45,600 across the company, including 6,500 at Heathrow.

Mr Walsh, the chief executive since October, also pointed to pensions, which he said "remains a big challenge for us". He said a survey of staff conducted by the research group Mori on pensions found that three-quarters of employees believed action was needed. BA will put forward proposals by the end of March.

BA's final-salary pension scheme, which is closed to new members, carries a deficit of £1.4bn. One of the problems that BA wants to tackle, before its Heathrow operations are relocated to Terminal 5, is to create common working conditions for staff.

Currently employees at Terminal 1, its short-haul base, and Terminal 4, have different working practices. City analysts expressed concern that the change may lead to strike action. But Mr Walsh said "we are pleased with the progress of negotiations with the trade unions".

Under the regime of the previous chief executive, Rod Eddington, BA cut 13,000 jobs in five years, after the post-9/11 downturn in the industry. Mr Walsh has also taken the knife to management numbers, with 600 staff told before Christmas that they were to go.

BA reported yesterday a 29 per cent rise in third-quarter profits, after more first- and business-class bookings helped offset rising fuel and labour costs. Operating profits for the three months to the end of December came in at £175m, compared with £136m a year earlier.

A recovery in first- and business-class, or premium, traffic and new international routes to India and Shanghai helped BA keep planes full, while ticket prices stabilised in the period. A recovery in premium traffic on transatlantic and other long-haul routes has helped BA counter stiff price competition on European short-haul flights from the low-cost rivals Ryanair and easyJet.

Mr Walsh said not only had there been a rise in business travellers but leisure passengers had also paid to travel business class. "It shows that we have a product that people are prepared to pay for," he said.

BA admitted the gains had come partly from greater advertising and marketing activity, which would have to be maintained. Total selling costs in the quarter rose 8 per cent to £110m.

"The issue for us is to continue active promotions of our services and that is paying off. We are seeing good traffic volumes in our premium cabin," Mr Walsh said.

BA predicted 8 per cent revenue growth for the current year compared withprevious forecasts of 6 to 7 per cent.