Business | Aviation
British Airways first-half profits dive 92% but shares take off
Shares in British Airways (BA) rallied strongly on Friday in spite of news of a plunge in first-half profits and the scrapping of its interim dividend.
- Financial Times
- Published: 22:50 November 8, 2008
London: Shares in British Airways (BA) rallied strongly on Friday in spite of news of a plunge in first-half profits and the scrapping of its interim dividend.
Willie Walsh, BA's chief executive, said the group had achieved a "good performance given the incredibly difficult trading conditions amid the surge in fuel costs and falling traffic volumes".
"The six-month period will be remembered as one of the bleakest on record," said Walsh.
Pre-tax profits fell 91.6 per cent in the six months to the end of September from record levels a year ago while premium traffic fell 9.2 per cent year-on-year. However, the results were better than feared by the market.
Earnings forecast raised
BA raised its earnings forecast slightly for the full year. It said it was "focused on delivering a small operating profit" for the 12 months to the end of March, replacing previous guidance that it was aiming just to break-even.
The carrier forecast revenues in the full year would rise by at least 4 per cent compared with an increase of 3 per cent previously forecast.
BA shares rose by 11.9 per cent to close at 146p, the biggest percentage rise in the FTSE-100. The group said it had launched a "major review" to simplify the business, cut costs and remain competitive.
The review included the cancellation and deferral of "significant projects" such as lounge renovations and some IT changes.
The airline is planning to reduce capacity in the next summer season from April to October by about 1 per cent following cuts of 3 per cent this winter.
BA operating profits in the first six months fell by 75.3 per cent from £567 million to £140 million, while pre-tax profits fell from £616 million to £52 million.
Strategically the airline has chosen to raise fares and to accept the impact in lower passenger traffic.
Turnover in the six months rose by 6.4 per cent from £4.47 billion to £4.75 billion thanks to a 10.5 per cent rise in yields, or average fares.
Traffic is shrinking, however - down overall by 4.4 per cent in October. It said improvements in yields were expected to more than offset volume reductions.
Virgin Atlantic, BA's arch long-haul rival at Heath-row, said Friday, however, that it was gaining market share from BA and was raising profits.
The airline said that its premium traffic increased by 2.4 per cent in October. It said it had increased its operating profit in the six months to the end of August from £45.5 million to £48.7 million.
BA said its fuel bill was expected to rise by about £1 billion, or 50 per cent, to £3 billion this year.
The weakness of the pound against the dollar and existing hedging contracts taken at higher prices than current levels had offset lower fuel prices.
It had a £31 million loss on fuel derivative contracts due to the fall in the oil price.
The group is reducing capital expenditure and jobs to preserve cash and cut costs. It took a £40 million charge for severance costs to reflect the removal of about a third of 1,350 managers eligible for voluntary redundancy and the closure of its Glasgow cabin crew base.
It was also planning to cut 1,100 jobs at Heathrow from 7,311 at the end of September to 6,214 in April following the transfer of most of its operations from other terminals to Terminal 5.
BA is seeking to catch up with the consolidation moves already made by Air France-KLM and Lufthansa of Germany, its bigger European rivals.
Commercial alliance
Walsh expressed strong interest in forming a commercial alliance with a restructured Alitalia, the Italian airline. BA is also negotiating a merger with Iberia, the Spanish carrier.
Walsh said: "We believe we have made a very credible and potentially exciting proposition for the new company [Alitalia]."
The offer was different to approaches made by Air France-KLM and Lufthansa to CAI, the Italian consortium which is in the process of rescuing Alitalia and merging it with Air One, its smaller Italian rival.
Walsh said BA was not interested in investing in an equity stake in the Italian carrier but he had been assured by CAI that that was no block to the two airlines forming a commercial alliance.
Martin Broughton, BA chairman, said the negotiations with Iberia had made only slow progress, while the Spanish side tried to understand the "arcane" UK rules for accounting for pension funds.
The talks face problems in fixing the share exchange ratio for a merger given the much steeper fall in the share price of BA than Iberia in the past three months.
Before Friday's rally the BA share price had fallen more rapidly than Iberia's since the merger talks were launched in late July, allowing the Spanish side to push for a bigger share of the combined airline.
A ratio of about 67 per cent for BA shareholders and 33 per cent for Iberia investors was indicated by respective market capitalisations at the end of July, but in the past couple of weeks this ratio had fallen to only 53 per cent for BA and 47 per cent for Iberia.
Walsh said: "65/35 or 60/40 is the natural ratio, that is how I see it."
More from Aviation
More from Business
Business Editor's choice
-
‘Wrong Way' Krugman
The source of our economic malfunction lies with government-mandated bank regulations
-
Greek exit could make Eurozone stronger
Departure will show limits of bailouts and allow remaining members to act much more like a unit
-
UAE upholds values of free trade
Recently released statistics confirm an established fact, namely that of the UAE embracing the free trade principle in general and imports in particular
