Slumping dollar takes shine off British Airways' record profits

Slumping dollar takes shine off British Airways' record profits
By Danny Fortson
Published: 03 November 2007

British Airways unveiled a record set of results yesterday but warned that growth would slow due to the high oil price and the plunging dollar.

The performance, coming despite a near one per cent drop in passenger revenue to £3.9bn, was fuelled by a series of cost cuts that have been pushed through by chief executive Willie Walsh. The carrier earned £593m before tax for the first six months of the year, up from £471m in the same period last year, and achieved a 12.5 per cent operating margin, beating its stated 10 per cent goal.

Mr Walsh reduced the revenue growth forecast however to 3.5 per cent – the second cut of the year – blaming the slowdown on America's weakening currency. "The big impact is the US dollar," he said. The greenback hit a new all-time low against the euro last week while the pound recently passed the $2 barrier.

The weak dollar wasn't all bad news for BA. The falling value of the greenback also meant that less money was flowing out of its coffers – its weakness was the main reason for a £150m drop in operating costs. Investors were nonetheless disappointed by the numbers, sending BA shares down 2.5 per cent.

BA is facing a raft of challenges – the oil price chief among them. Mr Walsh predicted that the soaring value of the black stuff will push the carrier's fuel bill for the year up to £2bn, an increase of £100m from the year before.

The company has also begun trialling Heathrow's new Terminal 5, set to open in March next year. Mr Walsh said it will be a catalyst for growth. Explaining the carrier's underwhelming revenue performance, he said: "We deliberately held back because we are focused on Terminal 5 getting established. "We will start to focus now on growing the business again. I think it's a bit of a crossroads for us, but it's exciting. Now it will be about fulfilling the potential of the company."

He predicted "strong revenue growth" for the second half, powered by continued strong demand from high margin business class and first class passengers. He didn't expect this to be dented by the Open Skies agreement, which will open the highly lucrative transatlantic routes to America to new competitors when it comes into effect in April.

BA will take advantage of the loosened regulations by shifting some flights now departing from Gatwick, such as those to Houston and Dallas, to Heathrow, and increase frequency of other services to prime destinations like Washington DC and Seattle. Gert Zonneveld, an analyst at Panmure Gordon, said that the spectre of increased competition was not an imminent threat.

"Open Skies will not have a substantially negative impact on BA in the near term. Heathrow is exceptionally congested and we only expect a limited number of new routes by US competitors (most of which could replace existing Gatwick services)," he said. "We also expect benefits from the opening of Terminal 5 next year and the possible relaxation of hand luggage restrictions, which is having a negative impact on connecting traffic.

Mr Walsh also said BA was making "good progress" on the joint bid it is preparing with American private equity giant TPG for Iberia, the Spanish airline. The bidding partners, who are also working with a trio of Spanish investment firms on the offer, are working on getting the financing in place to launch a bid that will value the carrier at up to ¿3.4bn. "We are confident and committed to making progress. A firm offer is likely still "two to four weeks away," he said.

from: news.independent.co.uk