BA blames profits fall on farming crisis and slowdown

British Airways yesterday blamed the foot-and-mouth epidemic and the slowdown in world economic growth for a near halving in first-quarter profits, and warned that the outlook remains "challenging".

Shares in the airline rose, however, as optimism grew that a renewed attempt to merge the airline's transatlantic services with those of American Airlines would gain regulatory approval.

Operating profits for the three months from April to June fell to £50m compared with the same period last year. The foot-and-mouth epidemic and weak demand, particularly in the American market, combined to reduce passenger traffic by 11 per cent.

This, coupled with an 8 per cent increase in unit costs, more than offset the 13 per cent improvement in yields generated by the higher proportion of business-class travellers flying with BA.

Rod Eddington, British Airways' chief executive, said that improving the airline's core business would remain the principal objective, indicating that further cost-cutting measures were in store.

Staff costs rose 3 per cent to £612m, while the number of employees increased by 2,000 to just under 60,000.

Mr Eddington said that there was a "small window of opportunity" for BA to obtain regulatory approval for the alliance with American Airlines, and for the UK and US governments to conclude an "open skies" agreement liberalising air services across the Atlantic. "There is a sense of urgency and clearly this cannot drag on and on," he said.

BA and American Airlines will file for regulatory clearance from competition authorities in London, Brussels and Washington in the next few days. They are understood to be hoping for approval by about the turn of the year, before the European Court of Justice rules whether Brussels should have the power to negotiate open skies deals with the US on a multilateral basis.

If the US and the UK are prevented from agreeing their own bilateral deal, BA and American Airlines will not be able to proceed with their alliance because one depends on the other.

Mr Eddington re-iterated that BA and American would not agree a deal "at any price". The last attempt by the two carriers to merge their transatlantic services was abandoned in 1998 after EC competition authorities demanded the surrender of 267 take-off and landing slots at Heathrow.

Mr Eddington said the impact of foot-and-mouth, which had contributed to a 21 per cent decline in visitors to the UK in April, was likely to be short-term. However, the effect of the US slowdown and the threat of a wider economic downturn was more difficult to assess. "The real challenge will come in the winter period," he added.