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British Air profit drops
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May 25, 1999: 4:41 a.m. ET
Airline suffers 61% drop in 1998/99 profit; stock under more pressure
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LONDON (CNNfn) - British Airways announced a 61 percent fall in annual profit Tuesday, placing more pressure on embattled Chief Executive Robert Ayling.
Pretax profit collapsed to 225 million pounds ($363 million) in the year to March 31 compared to 580 million pounds a year earlier on a 3.2 percent rise in revenue to 8.915 billion pounds.
Though the result had been widely anticipated with a consensus forecast of 230 million pounds, investors continued to round on BA and Ayling. "It is really a terrible state of affairs for the company," said Hans Georgson, airline analyst at Barclays Stockbrokers in London told CNN.
Ayling has faced sharp criticism for the airline's strategy and a poor industrial relations record culminating in a series of strikes by cabin crew last year which are seen to have damaged its passenger service, once regarded as among the best in the business.
BA's share price has halved over the last year and under performed the FTSE 100 by 35 percent over the same period. BA (BAY) shares slumped almost 2 percent to 454 pence in London Tuesday.
The airline increased its dividend by 7.9 percent to 17.9 pence a share. Underlying profit was even worse as the headline figure included a one-time gain of 48 million pounds from the sale of telecom unit Equant, though BA also took a 98 million pound hit from currency losses on yen-denominated aircraft loans.
A victim of success
Fierce competition on transatlantic routes pulled down passenger fare yields - the average price for a kilometer of travel -- by 7.4 percent to 5.91 pence. The fall was in line with BA's major competitors, Lufthansa (FLHA) and KLM Royal Dutch Airlines, which also reported 50 percent falls in profit for the last year.
Traffic at the world's largest international carrier increased 10.8 percent while seat capacity rose 11.8 percent.
BA's unit costs fell 7.3 percent, aided by sharply lower fuel prices, but analysts said BA had become victim of its own success. "The difficulty is that if you are a lean and mean operator like BA you are left with very little to cut in times of trouble," said Georgson.
Squeeze on seats
Ayling aims to double operating margins over the next five years by focusing on premium business passengers. The airline plans to slash the number of low-yield economy seats it sells and reconfigure its aircraft to offer more business-class seats and fewer in coach class.
It is already changing the mix of its long-haul aircraft, moving away from 400-seat Boeing 747s to 300-seat Boeing 777s. It plans to repeat the exercise on its European network, substituting 150-seat 737s for 200-seat 757s.
BA is also expanding the network of its low-cost domestic and European subsidiary Go, whose staff are on lower wage scales.
The airline has also suffered from the three-year regulatory delay on both sides of the Atlantic over its planned alliance with American Airlines (AMR). BA still hopes to cement the deal in a diluted form if U.S.-U.K. aviation talks reach a long-awaited agreement on a new bilateral agreement between the countries.
The delay has allowed BA's rivals -- notably the Star Alliance led by Lufthansa, United Airlines (UAL) -- to lure more business passengers with their strengthened network and frequent-flyer perks.
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