British Airways Sees More Red Ink

British Airways (BAY.L) is predicting a second year of £150m losses in 2009/10, with hints of further job cuts to come. Further cost reductions of £220m, excluding the vagaries of the fuel bill, are being targeted to help the flag carrier withstand the effects of a two-year recession. But revenues are down 5 per cent and substantial losses are nonetheless expected for the year to March 2010, the company said yesterday.

Passenger numbers are plummeting as both domestic and corporate travellers rein in spending. But BA has managed to limit staff reductions. Although 480 management posts were cut before Christmas, and about 100 jobs were lost at Gatwick in the autumn, the majority of the 2,400 headcount fall since last summer has been natural wastage.

But there may be more significant cuts to come, the airline implied yesterday, alongside predictions of future losses similar to the £150m anticipated in the current year. "A similar operating result for 2009/10 to that forecast for 2008/09 has been targeted, before any severance costs in 2009/10," the company said.

None of the carrier's executives will take a bonus and the airline is already in talks with trade unions over plans to freeze base pay until February 2010. A plan to offer further voluntary redundancies in areas where work could be redistributed is also already under way.

One ray of light in an otherwise beleaguered industry is the falling cost of fuel. Last year, fuel costs rocketed as oil jumped to an unprecedented $147 per barrel. And when oil began to fall, airlines' hedging strategies delayed the benefit of the reductions. BA's fuel costs rose £950m to £3bn in 2007/8, but they are expected to drop by about 10 per cent in the coming year.

The airline's parlous financial position, on top of an ever-growing pension deficit, are thought to be a sticking point in negotiations over the merger with Iberia, the Spanish flag carrier. But Willie Walsh, the BA chief executive, yesterday denied that the merger ratio was a bone of contention in discussions, which have dragged on since last summer. Mr Walsh said the "single area of difficulty" in the talks relates not to the proportion of shares each airline takes in the merged parent company, but rather about governance issues around the financial control that the parent company could exercise over the two operating companies.

BA's latest passenger numbers, published earlier this week, make grim reading. Business class traffic, which generates the majority of the airline's profits, was 20 per cent lower last month than in February 2008. The trend is accelerating downwards, following reductions of between 10 and 15 per cent in the previous three months. Economy travel was little better, reduced by 5.5 per cent, taking the total down by 10.1 per cent year on year.

BA is not alone in its struggles with the economic environment. Ryanair, a budget rival, reported earlier this week that passenger numbers grew by 7 per cent, or 290,000 people, in February. But last quarter's results saw a €120m (£107m) loss thanks to the carrier's massive fuel bill.

More than 30 airlines have gone bankrupt across the world in the past 12 months. And the carnage is not over yet, according to experts. "Although the reduction in fuel prices will provide a small respite for airlines this winter, the next six to 12 months is likely to see further significant changes, losses and failures within the industry," Graham Pickett, a partner at Deloitte, said.

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