May 19, 2007

British Airways facing big fines

British Airways was braced yesterday for multimillion-pound fines and legal action after admitting it broke competition rules.

The airline said it had set aside £350m as its "best estimate" to cover potential claims stemming from the discovery last year that senior staff had discussed long-haul fuel surcharges with rivals.

The UK's Office of Fair Trading and the United States Department of Justice have been investigating alleged price fixing on long-haul fuel surcharges since June.

If found guilty of operating a price-fixing or market-sharing cartel, an airline can expect to be fined as much as 10 per cent of its worldwide sales.

The £350m charge was taken in annual results yesterday, which showed profits of £611m against £616m a year earlier. At an operating level, profits for the year were down 13 per cent at £602m.

The fall came after a £350m rise in fuel costs, as well as the impact on revenues caused by increased security measures, fog and cabin crew disputes.

Profits were down by 68 per cent to £31m in the final quarter of the year after threatened industrial action caused passengers to switch to other airlines.

Chief executive Willie Walsh admitted it had been a challenging year for both the airline and passengers.

He said: "We know at times it has been a frustrating year for our customers, caused by disruption and overly-restrictive UK Government security measures on hand baggage."

BA said it was on track for operating margins of 10 per cent in the current financial year - triggering bonus payments for staff - but shares still fell amid cautious comments on current trading.

The company left guidance for revenue growth unchanged at between five per cent and six per cent, although it said it expected to be at the lower end of this range. It reported weakness in non-premium segments, most notably on the North Atlantic sector.

In October, BA's commercial director Martin George and communications chief Iain Burns quit the company. Mr George admitted that within his department "there may have been inappropriate conversations" in violation of company policy in relation to long-haul fuel surcharges.

BA admitted in its full-year results that it had broken competition law.

It said: "BA has a long-standing, clear and comprehensive competition compliance policy.

"This policy requires all staff to comply with the law at all times. It has become apparent that there have been breaches of this policy in relation to discussions about these surcharges with competitors.

"As a result it is now appropriate for the company to make a provision of £350m in its full-year accounts, which represents the company's best estimate of the amounts that could be required to settle all known claims in relation to these matters."

BA said fuel and oil costs, at £1.93bn, increased by 22 per cent in the year, even though
it was helped by a weaker US dollar. The annual bill is set for a further rise of £100m this year, to more than £2bn.

Analysts at Collins Stewart estimated last August's security disruption knocked £130m from the profits announced yesterday, while the threatened cabin crew dispute cost £80m.

Fog disruption over the Christmas period also hit profits.

Meanwhile, BA said it had not yet made a decision about the future of its 10 per cent stake in Iberia, the Spanish airline currently the subject of private equity takeover interest.

BA has ruled out making a bid of its own, but said it could work in conjunction with a buy-out group.

It has also announced plans to upgrade its Gatwick-based short-haul fleet by replacing the oldest 14 Boeing 737s with Airbus A319 aircraft. The move is in addition to eight new Airbus A320 aircraft scheduled for delivery between next year and 2010.


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