BA Profits down by 40%

Record fuel prices have almost halved British Airways ‘ third-quarter profits, but Europe’s No.2 airline has upped its annual revenue forecast as first- and business-class travel recovered and its cargo business improved.

BA forced to cut fares amid tough competition from low-cost rivals, warned that ticket prices were still expected to decline, but fuel surcharges and higher passenger numbers were helping offset some of the pain.

BA shares, trading at their highest level since June last year, rose 2.1 percent to 276-1/4 pence around noon on Friday after an initial cautious response to the result, which beat average and median forecasts.

Analysts said it was a solid performance, but remained concerned about falling ticket prices, and high fuel and employee costs.

“It is quite good on the revenue side and it shows the impact of fuel surcharges and a positive cargo development, however, operating margins down and cost impact of fuel are very strong,” BNP Paribas analyst Nick Van den Brul said.

“I think the outlook is still pretty modest for BA.”

BA said pretax profit for the three months to the end of December was 75 million pounds, compared to 125 million pounds a year ago.

The result exceeded the average forecast of 59 million pounds from a Reuters poll of 10 analysts. Forecasts ranged from 15 million pounds to 77 million pounds, with a median of 63 million.

The airline, which has outperformed many other full-service carriers by aggressively cutting costs, said it expected revenues for the year end-March to rise 3.0-3.5 percent, better than earlier guidance of 2-3 percent.

Chief Executive Rod Eddington attributed the improvement to higher passenger numbers and a continuing improvement in premium travel through January.

The result added to the chorus of better-than-expected news from European airlines that had — according to low budget firm Ryanair — been braced for a “bloodbath” this winter, though analysts attributed some of BA’s gains to a healthier economy.

“BA is showing that premium volume, business travel is recovering reasonably strongly on the back of a strong year for British GDP last year,” JP Morgan analyst Chris Avery said.

Ryanair raised expectations earlier this week when it upgraded its outlook, saying it was cashing in on the woes of other no-frills airlines and yields were expected to improve.

BA remained cautious on yields — or average revenue per passenger — saying European short-haul competition remained a problem but would not give specific forecasts.

Fuel costs remain the market’s top concern.

BA’s fuel bill in the period jumped 47 percent to 330 million pounds, but part of the burden was offset by surcharges on passenger tickets and cargo the airline introduced last year when oil prices hit record highs.

The airline’s “other revenues”, which Eddington said included surcharges, rose 50 percent to 226 million pounds.

BA said it has hedged 80 percent of its fuel buying at $32.00 for the remaining three months to March 2005, 55 percent at $36-$37 a barrel for rest of the year end-December 2005 and 24 percent at $38 a barrel throughout 2006.

Employee costs in the period increased 3.2 percent due to higher pension contributions.

Eddington said BA, which has axed 13,000 jobs and is now relying on more Internet sales and zero travel agent commissions to reduce costs, would remain focused on cost cuts next year.

“It is the never-ending journey. We continue to find ways to reduce our selling costs,” he told reporters on a conference call.

BA weathered an industry downturn following the September 2001 attacks on the United States but faced further frustration in 2004 from fuel costs, strike threats and flight