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British Airways raises profits, fuel surcharge

British Airways greatly improved profitability in its first quarter with operating profits almost quadrupling from a low point a year ago, when the global aviation industry was hit hard by the war in Iraq and the Sars outbreak.
/ Source: Financial Times

British Airways greatly improved profitability in its first quarter with operating profits almost quadrupling from a low point a year ago, when the global aviation industry was hit hard by the war in Iraq and the Sars outbreak.

The airline also said that from Wednesday it would more than double its fuel surcharge on long-haul flights from £2.50 to £6 per flight leg or from £5 to £12 in response to the recent surge in oil prices.

John Rishton, BA chief financial officer, said that oil prices had risen by 45 percent in the last 12 months and warned that the airline expected its fuel costs to jump by £225 million ($276 million) in the year to March 2005 to £1.14 billion, some £75 million more than was estimated in May.

In total the surcharges were expected to contribute £70 million towards offsetting these costs in the current financial year to the end of March 2005. Fuel will account for about 14.5 percent of BA's total costs this year.

The group has greatly increased the hedging of its fuel requirements reflecting its belief that the oil price is set to remain at a high level for some time.

Rod Eddington, chief executive, said the airline had hedged 72 percent of its fuel requirements to March 2005 at $32 a barrel. It had hedged just over 30 percent for the nine months to the end of December 2005 and 5 percent for 2006.

BA left the fuel surcharge on its short-haul services unchanged in the face of what Mr. Eddington described as the "ferociously competitive" market conditions in Europe.

He said he expected BA to remain loss-making on its short-haul operations this year.

The 54-year-old Australian, who joined the airline in May 2000, said he wanted to "squash rumors" about him leaving BA in the near future. "I still have a couple of laps left in me," he said.

He said he was on a rolling 12-month contract, and he had not set any date for his departure.

He said that BA would be his last executive job. "I will do it as long as I can...This is the only job I want to do and I am going to keep doing it. My focus is very much this year and next year."

Mr. Eddington said that he expected BA to continue to cut jobs in addition to the 13,000, or 23 percent of the mainline workforce, that were eliminated between August 2001 and March this year, but he gave no target.

Strike threatened
The airline is facing the looming threat of industrial disruption later this month at the peak of the summer travel season with two of its main unions currently balloting for strike action in a deepening conflict over pay.

"We are doing all we can to find a negotiated settlement," said Mr. Eddington. He hoped the unions would accept BA's offer of binding arbitration. There had not yet been an official response to this offer, but he said the unions were "not necessarily enamoured" of the idea.

In the first quarter from April to June BA exceeded market expectations by increasing its operating profits from £40 million to £150 million giving an operating margin of 7.8 per cent.

It achieved a pre-tax profit of £115 million compared with a loss of £45 million a year ago, when it suffered the full impact of the war in Iraq and the Sars outbreak.

Turnover rose by 5.1 percent to £1.9 billion, but BA repeated its previous forecast for an increase in revenues of only 2 to 3 percent for the full year.

It said that its yields, or average fare levels, had fallen by 4.5 percent in the first quarter from last year's already depressed level, largely due to foreign exchange movements. Mr. Eddington said the airline expected yields to "stay under pressure" for the rest of the year.

Fuel and employee costs remained the airline's "biggest challenges," he said.

Martin Broughton, who took over as BA chairman last month, said that strategies "to curb controllable costs" remained the key to achieving long-term, sustainable profitability".

The airline is facing significant cost pressures this year from labor, including a big jump in pension payments, airport charges and oil prices.

While facing a strike ballot over pay, BA is also seeking to cut its employee costs by £300 million in the two years to March 2006.

Mr. Broughton said that market conditions remained unchanged. Long-haul premium volumes were "recovering steadily," but short-haul premium travel remained at lower levels and non-premium markets were still "very price sensitive".

In the first quarter BA traffic volumes rose strongly by 7.9 percent, while capacity increased by only 3.4 percent. As a result the share of seats filled, the load factor, increased by 3.1 percentage points to 74.9 percent.