Sharp rise in costs prompts downgrading of BA profits

RUSSELL HOTTEN

Analysts downgraded British Airways full-year profits after it reported rising costs and disappointing passenger figures for the third quarter.

BA, linked in this weekend's Italian press as a possible investor in Alitalia, made profits of pounds 104m in the three months to 31 December. Although this was up from the pounds 80m a year earlier, the figure was still at the lower range of expectations.

The City had been worried about BA's costs, up 4.5 per cent half-way, and were looking for signs of a reduction. Instead, costs accelerated 9.2 per cent in the three months.

In Italy, speculation was mounting that BA may take a stake in Alitalia, the loss-making state airline that is being restructured.

Newspapers reported Silvano Barberini, general secretary of the Fit-Cisl, an aviation union, as saying: "The negotiations [by Alitalia] with British Airways and other private Italian airlines exist and continue. We have an obligation [to our members] to make them known." BA declined to comment.

BA passenger revenues were disappointing, with only a 5 per cent rise on the previous year. Andrew Chambers, of Strauss Turnbull, said the revenues were "not as good as recent months". Credit Lyonnais Laing cut its full- year profit forecast by about pounds 15m to pounds 565m, while Strauss Turnbull trimmed pounds 10m off its figure to pounds 580m. BA shares fell 19p to 502p.

A BA spokesman said the higher costs were because the company had invested heavily, including upgrading facilities with the new flying beds and cradle seats for premium customers.

Passenger revenues were affected by bad weather which caused flight cancellations, and the impact of the US government's shut-down. BA also said French nuclear testing in the Pacific had hit traffic from Japan to Europe.

Robert Ayling, chief executive, said the airline, which had cut pounds 900m off its cost base in the past five years, would continue to attack costs. "We will be tackling costs vigorously. I do not believe any airline our size can sustain business with the sort of cost bases they currently have over the very long term."

A total of 24.8 million passengers flew on BA's scheduled services in the nine months to December, up 5 per cent on a year ago.In the third quarter to December, 7.5 million passengers were carried, up 3.9 per cent. With average passengers flying further, growth in revenue passenger kilometres was up 8.7 per cent in the third quarter and 9.6 per cent in the nine months.

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