BA posts 13% drop in profit

British Airways has posted a 13 percent drop in yearly operating profits. It has also put £350 million ($692 million) aside for possible penalties over fuel surcharge fixing.
Full statement:

British Airways reported an operating profit of £602 million for the year ending March 31, 2007 (2006: £694 million). The operating margin was 7.1 per cent (2006: 8.5 per cent).  For the quarter, the operating profit was £31 million (2006: £98 million) giving an operating margin of 1.6 per cent.  The pre tax profit was £611 million (2006: £616 million) for the year and £27 million (2006: £98 million) for the quarter.

Group turnover for the year was £8,492 million (2006: £8,213 million), up 3.4 per cent on a flying programme up 0.7 per cent, measured in Available Tonne Kilometres (ATKs). For the quarter, Group turnover was significantly impacted by the threat of a strike and was down 5.9 per cent to £1,932 million, on a flying programme 1.5 per cent lower in ATKs.

Operating cash flow for the year was £756 million (2006: £1,339 million). Including current interest bearing deposits, the cash position at March 31, 2007, was £2,355 million, down £85 million compared with March 31, 2006.

Net debt was £991 million, a reduction of £650 million since the start of the financial year. The second installment of £560 million from the company’s £800 million cash injection was paid into the New Airways Pensions Scheme (NAPS) on April 2, 2007. This reduced the cash balances immediately after the balance sheet date to around £1,800 million.

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Traffic volumes, measured in Revenue Passenger Kilometres (RPKs), were up 2.9 per cent for the year and down 1.3 per cent for the quarter. Seat factor was flat for the year at 76.1 per cent on capacity 2.9 per cent higher in Available Seat Kilometres (ASKs) and down 2.0 percentage points in the quarter to 71.4 per cent. Yield measured in pence per RPK was up 2.1 per cent for the year and down 3.4 per cent for the quarter. Total costs, excluding one off items, were up 5.5 per cent, driven mainly by a 22 per cent increase in fuel costs to £1.93 billion. Non-fuel costs were up 1.1 per cent.

Cargo volumes for the year, measured in Cargo Tonne Kilometres (CTKs) were down 4.7 per cent compared with the prior year, with yields up 1.7 per cent. For the quarter, cargo volumes were down 12.4 per cent compared to last year. Cargo performance during the second half was impacted by operational and security related issues.

The results include a £396 million credit as a result of a change to the New Airways Pension Scheme (NAPS).

The investigations by the US Department of Justice, the European Commission and the UK Office of Fair Trading and others into anti-competitive activity on long haul passenger and cargo fuel surcharges are continuing. However, British Airways has now responded to the subpoenas and other statutory requests for information from these authorities.

British Airways has a long-standing, clear and comprehensive competition compliance policy. This policy requires all staff to comply with the law at all times. It has become apparent that there have been breaches of this policy in relation to discussions about these surcharges with competitors. As a result, it is now appropriate for the company to make a provision, under IAS 37, of £350 million in its full year accounts. The provision represents the best estimate of the amount to settle all competition authority and civil claims at the Balance Sheet date, but recognises that the final amount is subject to uncertainty.

Willie Walsh, British Airways’ chief executive, said:

“These are strong results despite a challenging year.  We know at times it has been a frustrating year for our customers, caused by disruption and overly restrictive UK government security measures on hand baggage.

“We have taken steps to ensure the fundamentals of our business are strong, laying the foundations to deliver our 10 per cent operating margin target by March 2008. We have addressed the £2.1 billion pension deficit and disposed of the loss-making regional business, BA Connect. Our total cost control has been good, with non-fuel costs up just 1.1 per cent.

“We are on the threshold of a new era for our customers. Terminal 5 is only 313 days away and tickets for flights from T5 are now available for sale. Our new Club World cabin is now on 96 services to New York’s JFK airport and we will be investing in a fantastic new First cabin. We have made progress on Gatwick, particularly on costs, which has given us the confidence to renew our commitment to Gatwick and upgrade its fleet. This is a step towards a single shorthaul fleet.

“Earlier this year we ordered four new widebodied aircraft for delivery in 2009, and we anticipate making a further major order for 34 replacement and additional growth aircraft in the coming months.  Today we have announced an order for eight Airbus A320 family aircraft for the shorthaul fleet.

“The ‘open skies’ air treaty agreed recently between the EU and the US has given us some new and exciting opportunities.  We have filed an application with the US DoT for permission to operate services between any point in the US and any point in the EU to enable us to grow the most profitable part of our business.”

Martin Broughton, British Airways’ chairman, said:

“We are pleased with the progress that Willie and his team have made on many fronts this year despite all the challenges.

“In terms of current performance, we have seen some weakness in non-premium segments notably on the North Atlantic. To some degree, complete visibility is hampered by the ongoing baggage restrictions which impact all cabins but particularly premium. Our revenue guidance of 5-6 per cent increase is unchanged but we now expect to be at the lower of end of this range.

“Cost control remains a key focus and full year costs, excluding fuel, are still expected to be some £50 million higher than the year just reported.

“Our goal to achieve a 10 per cent operating margin by March 2008 remains on track, although year over year improvements are likely to be delivered predominantly in the second half as we cycle against record results in the period to August 10 last year.”

The Board has recommended that no final dividend be paid.
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