British Airways presents its interim management report for the six months ended September 30, 2010.

Period highlights:

Profit before tax of £158 million (2009: loss of £292 million)
Revenue up £345 million due to improved yields
Costs down 1.5 per cent
Operating profit of £298 million (2009: loss of £111 million)
Quarter 2 operating profit of £370 million (2009: loss of £17 million)

British Airways’ chief executive Willie Walsh, said:

“Our concerted efforts to introduce permanent structural change across the airline has led to a reduction in non-fuel costs and a return to profitability. Revenue has increased, driven primarily by yield improvements and, while fuel costs have risen, they are in line with our expectations.

Our focus on permanent structural change will continue. This summer we agreed a new productivity deal with our Heathrow terminal-based staff that will provide a more flexible, cost-efficient and customer focused ground operation. In addition, the first of the cabin crew recruited on new terms and conditions have completed training and start flying on Monday.

“At a strategic level, we launched our transatlantic joint business with American Airlines and Iberia earlier this month, having received regulatory approval in the summer. Also, we expect to complete our merger with Iberia in January 2011. Regulatory information about the merger has been sent to shareholders in advance of shareholder meetings on November 29 to seek approval for the merger.

“Our customers remain our main focus. Our first two Boeing 777-300ER aircraft – with new cabins and in-flight entertainment throughout - are now in operation with the third scheduled to enter service next month. Customer reaction to the new aircraft has been fantastic. We announced new routes from Heathrow to Tokyo Haneda and San Diego, Gatwick to San Juan in Puerto Rico and London City to Stockholm that will start next year. A new winter ski route from London City to Chambery will launch in December.

“Despite disruption caused by numerous air traffic control strikes across Europe this summer, 74 per cent of our Heathrow flights and 84 per cent of our Gatwick flights departed on time, significantly outperforming our major competitors.”

Financial review:

Total revenue for the period was up 8.4 per cent.

Passenger revenue was up 7.9 per cent, on capacity down 6.2 per cent.  Yields improved by 17.2 per cent, 14.4 per cent excluding the impact of exchange, driven by price and mix across all cabins.

Our cargo business continues to see strong performance, with revenue increasing by 39.4 per cent, driven by yields recovering from the market low point of last year, as well as strong premium product performance and higher fuel surcharges. Cargo volumes, measured in cargo tonne kilometres, increased by 2.4 per cent.

Operating costs were down 1.5 per cent.  Fuel costs were up 2.4 per cent, and other non fuel costs reduced by 3.1 per cent, 4.0 per cent excluding the impact of exchange. 

Non operating costs include net finance costs of £78 million and £41 million of pension costs.

The result for the period along with our share of movements in associates reserves have increased reserves by £173 million to £865 million.  The marked to market movement on fuel and cash flow hedges was not significant during the period.

Profit before tax for the period was £158 million.

The effective tax rate for the period was 27 per cent.

Our cash position remains strong, at £1,857 million as at the end of September, up £143 million from the end of March 2010. Our net debt position reduced by £241 million to £2,047 million from £2,288 million at the end of March 2010.

The Directors declare that no dividend be paid for the period ended September 30, 2010.

For quarter two, we recorded an operating profit of £370 million, 14.7 per cent operating margin and a profit before tax of £322 million.

Business review:

We remain committed to our key business priorities.

Upgraded customer experience

Our new First cabin has been installed on 12 aircraft and will be fitted across the longhaul fleet by the end of next year.
   
Capacity and fleet

We have more direct Caribbean services than any other European airline with 64 weekly flights to 15 destinations. Next summer we are increasing flights from Gatwick to Barbados and Antigua and between St Lucia and Port of Spain, as well as to Tampa and Cancun. Flights from Heathrow to Buenos Aires will go direct rather than via Sao Paulo.

With increased capacity planned for next summer, we are bringing back into service a second temporarily parked Boeing 747 aircraft.

Our subsidiary BA CityFlyer is to increase its fleet size by almost 20 per cent by converting options for two Embraer 190SR aircraft.

Competitive cost base
         
Our achievement to date in introducing structural change, leading to a more competitive cost base, has enabled us to grow our business in a way that would not have been profitable previously.

Corporate responsibility

We have launched an engineering apprenticeship scheme in conjunction with Brooklands, Farnborough and Kingston colleges. 90 students started the scheme this autumn, and having successfully completing their year at college, they become full time employees of the airline, based at Heathrow. They will then gain experience working across various engineering departments and qualify for a City and Guilds Certificate in Aeronautical Engineering.

Our graduate programme is being extended to include overseas graduates with the first candidate coming from the University of the West Indies next year. The scheme will be rolled out across Africa, and in Brazil, India, China and other countries served by the airline.

We are participating in Cranfield University’s Sea Green project to solve how to harvest algae to produce jet fuel in commercial quantities.

Principal risks and uncertainties

During the period we have continued to maintain and operate our structure and processes to identify, assess and manage risks.  The principal risks and uncertainties affecting us, detailed on pages 33 and 34 of the March 31, 2010 Annual Report and Accounts, remain relevant for the remaining six months of the year. 

The risks include brand reputation, competition, consolidation/deregulation, debt funding, economic conditions, employee relations, events causing long-term network disruption, failure of a critical IT system, fuel price and currency fluctuation, fuel supply, government intervention, Heathrow operational constraints, key supplier risk, pandemic, pensions and safety/security incident.

Air Passenger Duty (APD)

From today (1st NOV) there are further increases in APD of up to 55 per cent on some longhaul flights. We already meet our carbon costs twice over even before these increases. Aviation supports more than 500,000 jobs in the UK and provides the transport links that are vital to the success of UK businesses in a globalised economy. Excessive taxation puts aviation’s social and economic benefits at risk.

Related parties

Related party disclosures are given in Note 20 to the condensed consolidated financial information.

Trading Outlook

While positive, the economic environment continues to be subject to uncertainty, to which the increase in APD is unhelpful.  We continue to focus on managing our costs.