BA plunges to record £401m loss - Airline scraps dividend

BA plunges to record £401m loss - Airline scraps dividend
By Kevin Done, Aerospace Correspondent
Copyright The Financial Times Limited 2009
Published: May 22 2009 08:22 | Last updated: May 22 2009 15:46
http://www.ft.com/cms/s/0/4abb7680-46a0-11de-923e-00144feabdc0.html


British Airways plunged to a record loss in its last financial year to the end of March from a record profit a year earlier with a £1.3bn reversal in its fortunes, the worst slump in its history.

Willie Walsh, chief executive, warned on Friday that the “prolonged nature of the global downturn makes this the harshest trading environment we have ever faced.” He said there was “no immediate improvement visible.”

The airline scrapped its dividend, which had only been reinstated a year earlier after a prolonged gap of paying no dividends since 2001.

Shares in BA fell 6.8 per cent in early London trading but recovered some of those losses to stand 7.1p or 4.4 per cent lower at 155.7p in afternoon trading.

Martin Broughton, BA chairman, said “any recovery is likely to take longer than initially envisaged.”

The UK flag carrier said the airline industry “continues to face very difficult trading conditions, with considerable uncertainty over the likely timeframe of the global economic downturn.”

Current levels of traffic volume and average fare levels had not improved from the last quarter of the financial year from January to March, and BA said it was unable to provide any financial guidance for the current year or even for the first half “because of the difficulty in forecasting revenues.”

It is continuing to cut thousands of jobs with 2,500 posts eliminated since last summer, and is locked in difficult negotiations with its trades unions on further cuts and productivity improvements.

BA said it was cutting capital expenditure in an effort to conserve cash. It was not paying management bonuses, no base pay increases were planned and it was offering staff the option of unpaid leave and temporary or permanent part time working.

Its results last year already included £78m of charges for redundancy-related costs.

BA was hit last year by reduced passenger and cargo demand, with a particularly sharp fall in demand from the most lucrative business travellers, and by high fuel prices last summer.

It reported on Friday a precipitous slide in its financial performance to a pre-tax loss of £401m last year from a pre-tax profit of £922m a year earlier. It had an operating loss of £220m, including the severance costs of £78m, down from an operating profit of £878m a year earlier.

Revenues for the full year rose slightly from £8.76bn to £8.99bn, but there was an underlying fall of 3.7 per cent excluding exchange effects.

Crucially the airline was hit by a rise of nearly £1bn in its fuel bill to £3bn, as its large volume of high price fuel hedges prevented it from benefiting from the sharp fall in the fuel price from the peak last summer. It forecast a fall in the fuel bill of around £400m this year.

As the recession tightened its grip, the airline’s performance slumped in the final three months of the financial year, with revenues dropping by 8.4 per cent, and it incurred an operating loss of £309m in the final quarter. Yields excluding exchange fell by 16 per cent in the quarter.

BA said it had changed its focus during the final quarter from January to March from driving yields (average fares) to cutting fares to secure volume, as its customers became much more price sensitive.

The airline said it was being forced to cut capacity again by a further 4 per cent in the coming winter season with the grounding of 16 aircraft following cuts in capacity of 3.1 per cent last winter and of 2.5 per cent this summer.

BA’s financial strength was undermined as its cash balance fell to just under £1.4bn at the end of March, down £483m on the previous year. Net debt was £2.4bn, up £1.1bn on March 2008, including £554m due to retranslation of foreign debt.

It said the retranslation of foreign debt and the mark-to-market movement on fuel and currency hedges had reduced its reserves by £988m, reflecting the weakness of sterling and lower fuel prices.

BA is also facing a rapid rise in its pension deficit, one of the factors that has undermined its negotiations on a merger with Spain’s Iberia.

It warned that if the financial markets deteriorated further, its pension deficit might increase, increasing its balance sheet liabilities, which might affect its ability to raise additional funds.