Jobs threat as BA sells regional operations to Flybe

Regional carrier survived turbulence in low-cost market

British Airways is to offload its loss-making regional operation to the rival airline Flybe in a move that will result in a one-off charge of £106m and hundreds of job losses.

The decision to sell BA Connect, which employs 1,900 staff and operates 52 routes from 13 regional airports, came as BA disclosed the financial impact of the terrorist security clampdown in August.

The disruption cost BA £100m, resulting in an 8 per cent fall in second-quarter profits to £240m. Pre-tax profits, including the impairment charge relating to the disposal of BA Connect, fell 27 per cent to £176m.

The combination of BA Connect and Flybe will create Europe's biggest regional airline with 10 million passengers and 159 routes. However, Jim French, the chairman and chief executive of Flybe, admitted that there would be hundreds of job losses as headquarters staff were cut and the route network was slimmed down.

BA will take a 15 per cent stake in Flybe as part of the agreement. The deal means that the Southampton-based airline will delay its planned stock market flotation next year until 2008. The float had been expected to value Flybe at £150m-£200m, although the takeover of Connect in effect doubles the size of the airline.

BA Connect lost £20m in 2005-06. Willie Walsh, BA's chief executive, originally said he would give the division until 2008 to return to profit, otherwise it would be sold or closed down. But he said that after clocking up losses of £6m in the first half of this year BA had concluded there was no prospect of it making a profit in its current form and had therefore decided to dispose of the business sooner.

"This is a good deal for us and a good deal for Flybe," he added. "It will secure many of the jobs which would otherwise have been under threat."

BA initially estimated the cost of the security restrictions imposed after the foiling of the alleged terrorist bomb plot at £40m. But the decline in premium traffic in the July-September period has forced BA to raise that figure to £100m.

Mr Walsh said that premium-passenger numbers last month were still below BA's forecasts, but he expected traffic levels to return to normal from this coming Monday when a further relaxation of baggage restrictions takes effect.

BA now expects revenues for the full year to be 4.5 per cent to 5 per cent higher than last year - half a point down compared with its previous guidance.

Despite warnings from BA's unions that strike ballots are likely over BA's planned changes to its pension arrangements, Mr Walsh said he remained confident of resolving the issue and plugging the £2.1bn deficit in its main scheme.

BA has offered to inject £500m into the pension fund in return for an increase in retirement age from 55 to 65 and a reduction in accrual of benefits. But the pilots' union Balpa has rejected this, demanding a £1bn cash injection from BA and an increase in its annual contributions from £235m to £280m.

Mr Walsh reiterated that BA could not afford to raise its contributions much above their current levels, but has said it is prepared to increase the one-off cash injection. Further meetings between the management and unions are scheduled for next week.

Flybe has flown a considerable distance since it took off as Jersey European Airways in 1979.

After steady expansion, the company became Britain's third largest airline, and in May 2000 rebranded itself as British European.

Barely two years later, it changed its name again to Flybe - the last two letters representing its two-year-old name. The new name was part of a radical attempt to survive the turbulence created by low-cost competitors such as Ryanair.

In 2004, thechief executive of the Irish carrier, Michael O'Leary, mentioned Flybe, along with bmibaby and My Travel Lite, as particularly vulnerable to the price war in the industry.

Hepredicted a time of "consolidation, acquisitions, mergers". Certainly his prediction of acquisition was prescient in Flybe's case.

Yesterday the Exeter-based carrier boasted that with the BA Connect business it would become Europe's largest regional carrier, earning more than £600m in revenue.

It willoperate from 59 airports instead of the present 47. Its current 101 routes will expand by more than 50 per cent and its five million annual passengers will double.

At present, 81 per cent of Flybe's equity is held by a family trust established to oversee the estate of the late Jack Walker, the steel stockholding millionaire and owner of Blackburn Rovers, the Premiership club.

Jim French, the chairman and chief executive, holds 9 per cent, while 10 per cent is held by an employee ownership trust. Each shareholding will be reduced proportionately to accommodate the BA stake.

Plans for the acquisition of the Manchester-based BA Connect emerge as Flybe announced its strongest summer trading period. It yielded an operating profit of £20.5m in the six months to 30 September, compared with £12.4m in the same period last year.

Mr French said that the new, larger organisation could be made profitable through a combination of investment in a new fleet and a much greater use of internet booking for passengers.