updated 11/3/2006 11:40:12 AM ET 2006-11-03T16:40:12

British Airways PLC posted a small drop in earnings for its second quarter Friday, blaming the chaos caused by August’s failed terrorist plot and rising fuel costs.

The carrier also revealed that it has agreed to sell its BA Connect regional operations to budget carrier Flybe, creating Europe’s biggest regional carrier with nearly 10 million passengers.

BA said that net income fell to 165 million pounds ($315 million) in the July-September quarter from 167 million pounds in the same period a year earlier. Sales increased 4.9 percent to 2.31 billion pounds ($4.41 billion).

“Premium traffic continues to be affected by the tighter security arrangements currently in place,” said Chief Executive Willie Walsh. “Transfers at Heathrow are more difficult.”

BA shares dropped 1.9 percent to 456 pence ($8.70) on the London Stock Exchange.

The discovery on Aug. 10 of an alleged plot to assemble and detonate improvised explosives on board as many as 10 U.S.-bound planes forced BA to cancel 1,280 flights after the government introduced stricter security measures at London’s airports.

Airport security staff struggled to cope with bans on the contents of hand luggage. The European Union this week adopted new security rules, allowing passengers to again carry a limited amount of liquids and pastes on board.

BA said that the disruption has cost it 100 million pounds ($190.8 million) and advance bookings have only just begun to return to last year’s level.

During the quarter, passenger traffic — measured in revenue per passenger per mile — rose 3.6 percent, with fuel and oil costs rising 30 percent to 534 million pounds ($1 billion) from 410 million pounds. It also said that passenger traffic in October, the first month of its fiscal third quarter, rose a moderate 1.1 percent from a year earlier.

The airline said the weaker passenger traffic growth had led it to lower its total revenue growth forecast to a range of 4.5 percent to 5 percent this fiscal year, compared with its previous guidance for a 5 percent to 6 percent rise.

It said it now expects fuel costs this year to be up 400 million pounds ($763.2 million) from last year.

BA’s quarterly results were also hit by a one-time writedown on its investment in its regional airline subsidiary, BA Connect, of 106 million pounds ($202.3 million).

BA will emerge with a 15 percent stake in privately held Flybe once the proposed sale of BA Connect is completed. No other financial details were disclosed by either party.

The enlarged company, which will focus on short-haul domestic and European major city markets, is expected to generate more than 600 million pounds ($1.1 billion) in revenue annually.

The proposed deal, which was instigated by Flybe, comes nearly a month after Irish budget carrier Ryanair Holdings PLC launched a surprise takeover bid for recently listed Aer Lingus Group PLC. Ryanair’s 1.48 billion euro ($1.9 billion) offer has been rejected by Aer Lingus.

“We’ve nothing else in the pipeline,” Walsh said, when asked about any further divestments.

Walsh also said he remained confident that a deal can be reached with trustees and staff over measures designed to close a 2.1 billion pound ($4 billion) deficit in the company’s main pension plan.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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