BA shares punished on outlook fears

Shares in British Airways fell sharply today as City gloom deepened over the airline’s trading outlook.

One analyst warned that oil prices remaining at current record levels could send BA’s operating profit plunging from £870m (€1bn) to as low as £25m (€31.3m).

There were also fears that a financial sector slowdown and increased competition could hit its most profitable routes across the Atlantic, sending shares as much as 7% lower.

The warnings came just days after the carrier posted record pre-tax profits of £883m (€1.1bn), paid a dividend for the first time since 2001, and rewarded staff with a £35m (€43.9bn) bonus pool.

Chief executive Willie Walsh said the results made him feel like he had “won the premier league”, but he warned about difficulties lying ahead this year thanks to high fuel costs.

Mr Walsh said the airline faced spending an extra £1bn (€1.2bn) on fuel this year if prices remained around the $120 (€76) a barrel mark. Crude currently costs around $125 (€80), having risen around 30% this year alone.

Andrew Lobbenberg of ABN Amro today cut the airline to a sell recommendation, citing the punishing cost of oil and looming travel cutbacks.

“We struggle to understand how the challenges facing the financial services industries are not affecting the transatlantic premium business and we think that in time BA will see weakness in this key segment,” he said.

He added that the recently signed Open Skies agreement which allows carriers to fly across the Atlantic from other countries could also have an impact on trading.

He said the airline faced having to axe some routes later this year to cope with the higher fuel costs.

“We expect BA will lower its capacity in the winter, in particular targeting its weakest performing capacity, which we believe is the short haul operations from Gatwick,” he said.

“We imagine BA will also make considerable efforts to reduce its non-fuel costs.”

Andrew Fitchie from broker Collins Stewart said the airline would need to make sharp cuts costs in the face of high oil prices.

“To be fundamentally economic at $120 (€76) oil, BA needs to either boost unit revenues by 14% or cut costs by 13%, or a combination of both,” he said.