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. Last Updated: 07/27/2016

British Airways Hit by Losses

LONDON -- British Airways posted its worst annual results in over a decade Tuesday as it laid bare the wounds of high fuel prices, overcapacity and fierce competition.

Europe's largest airline lost pounds 244 million ($360.7 million), excluding disposal gains of pounds 249 million, for the year to March 31. BA said its bottom-line pre-tax profit fell to pounds 5 million from pounds 225 million a year ago.

The figures marked BA's worst performance since privatization in 1987 but were slightly ahead of market forecasts.

In a show of confidence in its strategy, the airline kept its dividend unchanged at 17.9 pence.

But top executives sounded more cautious than the market had hoped over BA's short and medium-term outlook.

Analysts questioned whether the recovery that had been flagged under the airline's ousted chief executive was still on track.

BA chairman Lord Marshall said a forecast reduction in industry capacity would take some time to set in and warned that fuel prices and the pound's strength were still concerns. At an analysts' meeting, executives also pulled back from a target for an operating margin of 10 percent by 2003, one present said.

"There is some debate about the timing of the recovery and the rate of recovery. [Management] are not being as strong as [former Chief Executive Bob] Ayling was in his last few weeks," said Chris Avery, aviation analyst at J.P. Morgan.

He said the dividend could be cut next year.

Some investors took profits on BA's shares, though analysts said the stock was reacting to executives' caution when it fell as much as five percent throughout the day. The stock recovered by the close, ending the day two percent down at 366-1/2 pence.

BA said that besides disposal gains, the pounds 5 million profit included costs of pounds 126 million from the revaluation of yen debt used to fund aircraft purchases, pounds 88 million of restructuring costs and pounds 67 million in higher fuel prices.

Operating profit fell 81 percent to pounds 84 million. Fourth quarter pre-tax loss was pounds 175 million.

"These results mark the end of the most difficult year that British Airways has had since privatization," Marshall said.

BA has been plagued all year by stiff competition from low-cost airlines in Europe, surging fuel prices and fare discounting prompted by oversupply on North Atlantic routes.

Nonetheless, investors are starting to see the results of the airline's new strategy to restore profitability by cutting capacity and focusing on the more profitable parts of business.

BA said Tuesday that mainline scheduled passenger yield - average revenue per passenger per kilometer - rose 3.3 percent in the fourth quarter after a 3.2 percent rise last quarter.

The figures show BA is making more money by filling smaller planes with relatively more higher-paying business class seats at the expense of the unprofitable economy class.

Passenger load factor for the year fell 0.9 percent to 69.8 percent, but load factors in April have already improved, rising 3.1 points from the same period last year to 72.6 percent.

BA also said economic conditions had generally improved - with capacity on North Atlantic routes easing - and that the outlook for summer trading was better than last year.

"There are some promising signs going forward. The North Atlantic seems to be in better balance than it was 12 months ago," chief executive Rod Eddington said in an interview.

Eddington, who joined BA at the start of this month, also confirmed that he would stick to his predecessor's strategy.

The strategy, which aims to cut capacity by 12 percent over the next three years, has convinced the market and analysts have been seeking reassurance by Eddington that he will implement it.

Several believe some tweaking of the plans may lie ahead.

He gave no details, however, on how he will implement a plan to cut pounds 1 billion off BA's cost base by 2002.

Some 10 percent of BA's 60,000 workforce may have to go, analysts say.

Nevertheless, BA's two top executives said they could not be more than "cautiously optimistic" about the future.

"The reason one needs to keep one foot on the beach is that there are external issues like fuel prices and currency and we do need to recognize that we are investing a lot in our products over the next 12 months," Eddington said.

"We are not wholly sure where fuel prices are going. ... We were protected in part last year by a sensible hedging strategy. But we can't be protected by hedges when fuel prices go off the stair and that's the challenge we have this year."