View from City Road: Question marks over BA

For a company that should be a key beneficiary of a weaker pound, a 31 per cent drop in British Airways' first-quarter pre-tax profits may look a little disappointing. But that merely underlines how much worse they would have been if sterling had remained at last year's rate.

Like the rest of the industry, BA continues to suffer from fierce competition caused by overcapacity and a lack of first- and business-class flyers. That means the underlying revenue for each passenger kilometre probably fell about 5 per cent in the year to the latest quarter. But the actual number rose 2.3 per cent to 6.17p thanks to sterling's weakness. Coupled with the benefits of cutting more than pounds 400m from costs in the past two years, that was enough to push operating profits up 12.5 per cent.

The only area where BA hasn't been economising is in its international links, and the cost of its investment in USAir, Qantas and the rest were reflected in a fivefold rise in interest charges. While it is confident that these will eventually mean higher profits, even Sir Colin Marshall, chairman, is not expecting the benefits this year.

Nor is he forecasting how long it will take for demand to absorb capacity. Given that BA alone is adding 13 per cent to its seat numbers this year, it could be some time. On the bright side, the premium passengers that account for up to a fifth of revenue are coming back.

The market is still focusing on recovery rather than fretting about BA's aggressive expansion, and even yesterday's flimsy evidence was enough to send the shares up 14.5p to 350p. So far, BA has proved itself worthy of that faith - but the question marks remain.