BA warns of end to cheap air travel as profits plunge 88 per cent

British Airways yesterday called time on the era of cheaper fares as it warned the airline industry was in more difficulty than at any other time in its history.

Unveiling an 88 per cent drop in the airline's first-quarter profits, the British Airways chief executive, Willie Walsh, warned: "We are in the worst trading environment the industry has ever faced: the combination of unprecedented oil prices, economic slowdown and weaker consumer confidence has led to substantially lower first-quarter profits."

BA made a pre-tax profit of just £37m over the three months to the end of June, less than an eighth of the £298m it achieved in the same period last year. Although BA had attempted to hedge against the rising oil price, Mr Walsh said its fuel costs were £706m during the quarter, some £233m more than last year. The airline now expects its fuel bill to rise above £3bn this year, or more than £8m a day.

The airline is attempting to cut its costs and has already announced reductions in its winter capacity. However, Mr Walsh, who has already increased ticket prices by an average of 7 per cent this year, warned that further fare increases were almost inevitable unless there was an unexpected fall in the cost of fuel.

"This is the toughest trading we have ever seen – worse than 9/11," he added. "That was a severe hit but the recovery was relatively quick, this time it is different."

British Airways said its priority for the year was now to avoid falling into loss, a fate that has already befallen a string of other airlines. Some 25 airlines have already gone bankrupt this year.

Fares across the airlines industry have already risen significantly this year, though Ryanair, the Irish carrier, said this week that it would cut prices by up to 5 per cent before the end of 2008, despite facing losses of up to €60m (£47m) on higher fuel costs.

Michael O'Leary, the airline's chief executive, believes that cutting fares is the only way airlines will be able to fill seats as the economic slowdown in Europe continues to bite.

However, industry analysts warned that budget airlines trying to encourage passengers to keep flying through fare decreases would pay a heavy price for the strategy, and said they expected to see additional bankruptcies.

"We are likely to begin to see the full effect of the situation after the summer – when airlines can see the shortfall in bookings many will find that they are in a very hard position," said Douglas McNeill, an analyst at investment bank Blue Oar. "I fully expect we will see some smaller airlines go under and that the industry will look very different soon."

Doug McVitie, an aviation industry expert, said that the announcement by BA this week that it is in merger talks with Spain's Iberia would presage a new round of consolidation in the face of mounting costs. He predicted Europe's 30 or so airlines would combine into five or six major groups.

"The high oil price has changed everything, and budget carriers will have to begin to put up fares – I expect the fare increases to begin next spring," Mr McVitie said. "Any idea that the budget airlines can avoid this is absolute lunacy, and attempts to hold off raising fares will only result in bankruptcy."

outlook, page 49