Weak pound deepens BA’s woes

Flag carrier warns of £150m loss for the full year

British Airways is facing a £150m loss in the current financial year thanks to the falling value of the pound, putting yet more pressure on the airline’s merger deal with Iberia.

Despite plummeting traffic, the UK flag carrier was on course for a “small operating profit” when it delivered halfyearly figures in early November. But the collapsing value of sterling against boththedollarandtheeuro has hit hard and is expected to account for a £56m charge in the third-quarter-to-Decemberfigures.

The group forecast an operating loss of£150m for the year as a whole if exchange rates remain as they are.

When the profit predictions for the year were made, the pound was trading at $1.60 and €1.25. Yesterday it was $1.38 and €1.06, and has been lower. Although BA’s revenue guidance for the year of 4 per cent year-on-year growth remains unchanged, and the fuel bill will remain at £3m as expected, nonfuel costs are now expected to go up by 8 per cent rather than the 5 per cent forecast previously.

BA does derive some benefits from the fluctuations through sales of tickets in theUSandEurope, but the downsides are considerably more significant, aspokesman for the company said. “Any benefits are more than outweighed by the extra costs incurred through our extensive operations in the US and Europe,”

the spokesman said. “A high proportion of our flights go over at least some part of European airspace and we have to pay those charges in euros, for example. Then there are aircraft leasing fees in dollars, as well as other airport costs and charges.”

The company’s share price dropped 8.5 per cent to 133.8p following yesterday’s announcement, putting yet more pressure on the tie-up with Iberia. Negotiations over the proportions of the Spanish merger – already knocked off balance by the revelation of BA’s £1.74bn pensions deficit and the widening gap between the two share prices – could bescuppered by the currency issue, say some experts.

BA’s chief executive Willie Walsh said last week that he would not go ahead with a deal with a merger ratio below 60:40. But, at current exchange rates, the two groups’ market capitalisations are indicative of a split of 52:48 in favour of Iberia. Gert Zonneveld, an analyst at Panmure Gordon, said: “The profits warning makes the merger with Iberia even trickier because the 60:40 split is becoming ever more difficult to justify.

With the pension deficit, the share price issue and the currency question, it looks increasingly unlikely that the deal can go ahead.”

Blaming BA’s problems on currency alone may also not give the whole picture.

The airline’s traffic figures for December are down 3 per cent year on year, including a massive 12 per cent drop in premium passengers. That the upside of a stronger euro and dollar is not counteracting the cost increases elsewhere suggests that traffic numbers are continuing to fall.