May 18, 2007

British Airways Posts Loss on Fines, Labor Dispute

Bloomberg - British Airways Plc reported its first loss in eight quarters after setting aside 350 million pounds ($691 million) to settle antitrust fines and canceling flights because of a labor dispute. The stock fell to a six-month low.

Europe's third-largest airline had a fourth-quarter net loss of 128 million pounds, or 11.1 pence a share, compared with a profit of 80 million pounds, or 7 pence, a year earlier. Sales fell 5.9 percent to 1.93 billion pounds.

Chief Executive Officer Willie Walsh said today the company uncovered breaches of its own policies on consulting with competitors in setting fuel surcharges. The airline grounded 1,300 flights in the fourth quarter when cabin crews threatened to strike over pay and sick leave.

"The magnitude of the charge taken for the investigation is surprising, they are clearly flagging some negative issues to the market," said Gert Zonneveld, analyst with Panmure Gordon in London, with a "hold" rating on the stock. "Overall, it has been a tough quarter for them."

The shares fell as much as 24 pence, or 4.8 percent, to 477.5 pence and were down 3.7 percent at 12:28 p.m. in London. The stock has risen 66 percent since Walsh, 45, succeeded Rod Eddington, 57, as chief executive officer in October 2005.

The U.S. Justice Department, the European Commission and the U.K. Office of Fair Trading are investigating anti- competitive behavior linked to setting fuel charges on passenger and cargo flights. The 350 million-pound provision is the airline's "best estimate" of the cost to settle the cases, Walsh said.

Antitrust Investigation

Regulators are investigating whether the airline coordinated fare increases industrywide. British Airways, Virgin Atlantic Airways Ltd., American Airlines parent AMR Corp. and United Airlines owner UAL Corp. were sued in New York federal court on June 26 for allegedly conspiring to fix fuel surcharges.

Deutsche Lufthansa AG agreed to pay $85 million to settle 80 U.S. class action suits linked to price fixing, the carrier said on Sept. 11. The airline also received conditional immunity from prosecution from the U.S. and EU, it said.

British Airways' revenue growth will be at the lower end of a 5 percent to 6 percent range in fiscal year 2008 because there is "weakness" in trans-Atlantic demand, the company said. Fuel costs will increase by 100 million pounds to 2 billion pounds.

The airline also said it applied for permission to fly to the U.S. from any city in the European Union when the "open skies" agreement comes in effect next year. The treaty between the U.S. and EU eases restrictions on the $18 billion trans- Atlantic market.

Wider Loss

The fourth-quarter loss was wider than the 67.5 million- pound median estimate of analysts surveyed by Bloomberg News. The labor dispute cost 80 million pounds, the airline said. A U.K. increase in passenger taxes cost 11 million pounds.

Changes to the airline's pension fund resulted in a 396 million credit. The deficit in the fund has fallen to 1.6 billion pounds from 2.1 billion.

No final decision has been made on the future of the airline's 10 percent stake in Iberia Lineas Aereas de Espana SA, British Airways said. It continues to examine all options including full disposal, the airline said. There will be no further investment in the Spanish carrier and no independent bid by British Airways, the company said.

The airline also ordered eight Airbus SAS A320s for delivery starting in 2008. The aircraft have a list price of $66 million each. The airline plans to replace 14 Boeing Co. 737s based at Gatwick airport in London.

Threatened Strike

The flight attendants threatened to strike after Walsh tried to reduce sick leave and on-board staffing as part of a plan to save 50 million pounds. Traffic fell 15 percent in January and February. A settlement was reached Jan. 29, averting a walkout.

The airline has a target of achieving a 10 percent profit margin by fiscal 2008 through reducing expenses and increasing passenger traffic, particularly on routes to the Middle East, Asia and Africa. The margin was 7.1 percent in fiscal 2007, which closed March 31.

A decline of the dollar against the British pound led to a drop in traffic on trans-Atlantic routes. The dollar fell 13 percent against the pound in the quarter from the year-earlier period.

British Airways agreed on Feb. 7 to close its 2.1 billion pension deficit over 10 years. The airline will make annual payments of 280 million pounds during this period and a one-time contribution of 800 million.

Passenger traffic dropped 1.3 percent in the quarter. Load factor, or the average number of seats filled, fell, 1.6 percent.

"We would argue that the outlook for premium traffic, the main driver for the business, remains good as a result of continued underlying strength in corporate and banking sectors," said Andrew Light, an analyst with Citigroup Inc. in London who has a "buy" rating on the stock.

"Open Skies"

The shares dropped the most in 5 1/2 years on March 5 after the U.S. and EU reached a tentative agreement on easing restrictions on trans-Atlantic flights. The airline's future earnings might be hurt by new competition at London Heathrow, its main base, from U.S. carriers like Continental Airlines Inc. and Delta Air Lines Inc.

"This ambitious 10 percent profit margin target is facing three threats: potential competition from open skies, a weaker dollar and rising fuel bill," Zonneveld said.

Fuel is the airline's second highest cost after employee salaries with costs increasing in fiscal 2007 by 22.1 percent to 1.9 million pounds and by 5.6 percent to 455 million pounds in the quarter. To deal with the rising price of kerosene, the airline has raised its fuel surcharge six times since the introduction of the first payment in May 2004.

In January the surcharge fell 14 percent for long-haul flights of less than nine hours from 35 pounds to 30 pounds. The price of Brent crude oil traded in London has risen 11 percent so far this year.

Fuel Charges

In April the charge was increased again to 33 pounds from 30 pounds because of "volatile" oil prices, the airline said.

The airline will move into Terminal 5 at London's Heathrow on March 27 where it will operate exclusively processing 30 million passengers a year. It will consolidate the carrier's operations now divided between Terminals 1 and 4 in one location. Walsh estimated on Feb. 7 the airline will need a decade to earn back its 350 million-pound investment in moving to Terminal 5.

"The most significant benefit is expected to be the improvement in British Airways product," said Tim Marshall, analyst with UBS in London who has a "buy" rating on the stock.

British Airways ranks behind Paris-based Air France-KLM Group and Cologne, Germany-based Deutsche Lufthansa AG in passenger traffic.

By Emmet Oliver
To contact the reporter on this story: Emmet Oliver in London at .


No comments: