THE INVESTMENT COLUMN: Record profits but BA hits pockets of turbulence

British Airways discovered long ago that it takes more than another set of record profits to make its shares fly and yesterday was no exception. The market chose to disregard the 9 per cent climb in pre-tax profits last year to pounds 640m, preferring to concentrate instead on the pockets of turbulence that BA is encountering.

First, however, the good news. The rise in fuel prices, which sliced pounds 142m off profits last year, has gone into reverse allowing BA to factor in a gain of some pounds 60m for the current year. Second, the economic outlook is good in most of BA's main markets, notably the US and UK, suggesting that it should be able to maintain, if not improve, on passenger yields. Third, the Business efficiency programme is reaping returns at least in line with the airline's expectations. The measures announced so far will deliver pounds 600m of the pounds 1bn of savings BA is aiming to achieve by the turn of the century.

Now for the less good tidings. There is still no positive news on regulatory approval for the grand transatlantic alliance with American Airlines, while the strength of sterling could trim more than pounds 100m from profits this year and industrial unrest is building up. Unions are now threatening to follow up the current ballot of cabin crew with another among catering staff.

Of these, the absence of any regulatory green light for the AA alliance is the most frustrating. It is now approaching a year since the partnership was first announced and the two airlines are still awaiting clearance in Whitehall, Brussels and Washington. Contrast that with the rather extravagant way that Lufthansa, United and their partner airlines chose to launch their grandiose Star alliance in Frankfurt last week.

The betting remains that BA will get the necessary clearances. But the question is at what price, particularly with Margaret Beckett and her new team of ministers and special advisers around at the Department of Trade and Industry demonstrating little enthusiasm for the concept of national champions.

The souring of industrial relations is a more ominous portent for BA, since the success of its cost-efficiency drive hinges on its 58,000 workforce (up, incidentally, by 3,000 in a year) continuing to accept wage freezes and staff reductions along with the relocation or outsourcing of their jobs.

Bob Ayling, BA's chief executive, says there is no appetite for industrial action but until there is some positive news on the AA alliance, there may not be much investor appetite for BA either.

The shares, down 24p to 736p after a strong run, are hardly on an astronomic rating. Profits this year of pounds 720m would put them on a forward multiple of under 14. Still, investors should wait for the turbulence to pass.