May 14, 2007

Frequent Travelers Oppose AirTran Takeover of Midwest

The increasingly competitive trading conditions faced by British Airways and BT will be in focus when the pair report results this week. SECURITY measures, fog and cabin crew disputes will affect annual results at British Airways on Friday. Charles Stanley stockbrokers is looking for profits of £550m, down from £605m a year earlier, but still above the recent average for the airline.

For next year, BA is forecasting revenue growth of between 5% and 6% based on a capacity increase of 1.3%, traffic growth of 2.4% and a 3.4% improvement in passenger yields.

The goal for BA is an operating margin of 10% in the year to March 2008, which would trigger bonuses for the airline’s 44,000 staff. It is unlikely to achieve the margin target for the financial year just completed.

Apart from labour relations, Charles Stanley analyst Tony Shepard said the biggest threat to BA remained competitive trading conditions.

He said, “The airline cycle has been very strong for the last two years and BA has done well to grow its premium traffic. Recently, easyJet shares took a tumble as it warned about lower summer passenger yields and both Ryanair and easyJet have increased promotional activity.”

During the industry upswing BA has paid down debt and made a one-off £800m cash injection into its pension fund deficit.

BA plans to renew its fleet from 2010 onwards and this will require a strong balance sheet as it starts to spend £1bn a year over a 10-year period, Mr Shepard said. It is also due to move into Heathrow Terminal Five in March 2008.

In a fiercely competitive market, former state telecoms business BT appears to be holding its own in the battle for broadband business.

BT Retail’s share of broadband net additions was 34% in the final three months of 2006, the highest for over two years. BT has faced up to cut-price offers from Carphone Warehouse, but the market is unlikely to get any easier with the entry of BSkyB and the creation of Virgin Media following the mergers of NTL, Telewest and Virgin Mobile.

Further details on BT’s performance will emerge on Thursday, when it is due to post annual results showing a rise in profits from £2.18bn in 2006 to £2.55bn this time. Shareholders may also get a return of surplus cash, possibly up to £2bn.

Jim McCafferty, a research analyst at Seymour Pierce, said recent signs from Virgin that it had failed to win market share during the first three months of 2007 suggested BT had maintained its strong market position.

He added, “We believe BT’s superior customer service and reliability will see it maintain this leadership.”

BT is also in the process of launching BT Vision, which involves a set-top box providing programmes on-demand via broadband. BT hopes its payment on-demand charges, rather than subscriptions, are a selling point to new customers.

New wave revenues, such as broadband and corporate IT services, now account for more than a third of the group’s revenues, offsetting sales declines in BT’s traditional fixed-line business.

It has also prompted BT to create a new structure aimed at driving its transformation into a software services company.

BT said around 20,000 people would move from elsewhere in the business to staff two new units, one responsible for the design and development of services and the other to handle their deployment and operation.

The company said the structure benefited customers by bringing them new services quicker, while ensuring that BT is able to accelerate its development as a networked IT services company by delivering products over broadband.

With talks over the future of VT Group’s shipbuilding operation, attention has been diverted from the continued strong performance of the company’s core business, involving support services in the fields of defence, communications and education and skills. This accounts for 80% of its work.

Southampton-based VT – formerly known as Vosper Thornycroft – said recently that trading in all its divisions had been in line with guidance at the time of its half-year results, when it boasted an order book of £3.5bn.

It is in discussions with BAE Systems over the combination of the pair’s surface ship and naval support businesses. BAE and VT already work together on Ministry of Defence contracts, with VT building the bow and mast sections for the Royal Navy’s Type 45 Destroyer programme at Portsmouth. The rest of the work and assembly is done by BAE at Glasgow.

Consolidation in the naval shipbuilding industry has the backing of the Ministry of Defence.

Analysts expect full-year results tomorrow to show an improvement in profits to between £70m and £73m, compared with £61.5m a year earlier.


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