British Airways Posts Profit as Ticket Prices Surge

British Airways Posts First Profit in Two Years
British Airways last had a profit in the quarter through June 2008, 2 1/2 months before the collapse of Lehman Brothers Holdings Inc. prompted a slide in premium bookings. Photographer: Simon Dawson/Bloomberg

British Airways Plc posted a first profit in two years as surging sales of business tickets allowed it to ramp up fares. Europe’s third-largest carrier said its outlook depends on an economic environment that remains unclear.

Net income in the second quarter ended Sept. 30 was 229 million pounds ($365 million), compared with a 111 million-pound year-earlier loss. Sales rose 18 percent to 2.51 billion pounds.

British Airways, which last posted a profit for the quarter ended June 2008, shortly before the collapse of Lehman Brothers Holdings Inc., slashed capacity as the recession hurt bookings. That’s given it control over pricing as traffic returns, and yields -- a measure of fares -- jumped 20 percent in the three months, Chief Executive Officer Willie Walsh said today.

“This is a cyclical recovery par excellence, driven by a phenomenal growth in yields,” said Douglas McNeill, an analyst at Charles Stanley in London, where British Airways is based. “The question now is how long that can be sustained. Capacity is going to grow and that will limit further price improvements.”

British Airways shares, up 50 percent this year before today, were trading down 1.9 percent at 275.3 pence as of 10:51 a.m. in London, valuing the company at 3.18 billion pounds.

Iberia Profitable

McNeill said he has a “sell” rating on the stock because of its gains, the biggest in the eight-company Bloomberg EMEA Airlines Index after Spain’s Iberia Lineas Aereas de Espana SA, with which British Airways is merging. Iberia today posted quarterly net income of 74 million euros ($103 million), versus a 16 million-euros loss in 2009. The shares fell 1.4 percent.

Air France-KLM Group and Deutsche Lufthansa AG, Europe’s biggest carriers, both raised earnings forecasts this week as airlines across the region benefit from the pick-up in travel. Cologne, Germany-based Lufthansa reported a 17-fold increase in nine-month net income to 524 million euros.

British Airways didn’t comment today on its earnings target of breaking even on a pretax basis this fiscal year, and said that “while positive, the economic environment continues to be subject to uncertainty,” and that it remains focused on costs.

“If you run an airline and you look at consumer confidence you have to be cautious,” said Gert Zonneveld, an analyst at Panmure Gordon in London with a “hold” rating on the stock. “Business travel is the big factor, and British Airways has been seeing a recovery in the premium cabin for months now.”

Heathrow Flights

CEO Walsh said that capacity control is boosting margins as airlines show “a lot more discipline,” and that there’s more upside to come from long-haul and short-routes, with the recovery in European traffic “much stronger” than expected.

British Airways may pare shorter flights at London Heathrow airport to build up the more lucrative inter-continental network, while adding more European services at the U.K. capital’s City terminal, which has exceeded traffic forecasts.

Premium travel rose 9.1 percent worldwide in August, the International Air Transport Association said on Oct. 14. Demand in the segment is about 17 percent higher than at its low point in 2009, according to the trade body.

Yields will continue to show year-on-year gains and aren’t yet back to their highest previous levels as sales of the most costly fully flexible tickets continue to lag, Chief Financial Officer Keith Williams said on a conference call. A capacity increase of 4 to 5 percent is planned for next summer, he said.

Ahead of Estimates

First-half net income amounted to 107 million pounds, or 7.9 pence a share, compared with a loss of 217 million pounds, or 18.8 pence, a year earlier, British Airways said in its statement today. Sales rose 8.4 percent to 4.45 billion pounds.

Analysts had predicted a six-month profit of 41.5 million pounds, according the average of seven estimates.

The return to profit comes after British Airways suffered a 425 million-pound loss in the year through March as the impact of the slump was compounded by a harsh winter and a series of strikes involving its 12,000 cabin crew. Losses continued into the current fiscal year as a cloud of volcanic ash from Iceland shut European airspace and further walkouts grounded flights.

Walsh, 49, has made a proposal to resolve the 20-month dispute over staffing levels and pay which the Unite union will recommend that flight attendants accept. A “no” vote would lead to a new strike ballot and possible disruption over Christmas.

Lower Costs

Walsh is also hiring new crew members on less lucrative contracts, the first of whom will begin work next week.

Operating costs were reduced by 1.5 percent in the half, with the fuel bill up 2.4 percent and non-fuel expenses down 3.1 percent. British Airways is hedged on 30 percent of its kerosene needs for fiscal 2012, while a hike in U.K. departure tax will increase its contribution by 100 million pounds, Williams said.

Today’s results are the last before British Airways merges with Madrid-based Iberia to form International Consolidated Airlines Group SA. The combination of carriers with market values totaling $9.3 billon is scheduled to be completed in January after shareholder votes next month.

Walsh, who will lead the enlarged group, said last month that British Airways and Iberia are already working to identify further takeover candidates even before their deal is complete.

The CEO has also deepened ties earlier with AMR Corp.’s American Airlines in a trans-Atlantic venture that began Oct. 6 and which will give the carriers control of almost 50 percent of U.S. flights at London Heathrow, Europe’s busiest hub.

Walsh said today he’s “very pleased” with the alliance’s performance so far, with 80,000 tickets sold as of Oct. 25 compared with fewer than 35,000 a year earlier, and that the business presents an opportunity “greater than first believed.”

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