British Airways has reported a pre-tax loss of £60m during the last three months of 1999, as competition and high fuel prices continue to bite.

However, the airline said it was on the way to recovery, with yields - the earnings per seat - improving for the first time since the fourth quarter of the 1997/1998 financial year.

BA said its pre-tax profits for the full nine months to 31 December were £180m, on a turnover of £6.83bn. This was slightly better than City analysts' predictions.

The passenger yield rose 3.2%, compared to a fall of 7.1% and 5.2% respectively in the first and second quarters.

In a statement, the company said that "capacity growth has been reined back, premium traffic is showing good growth, traffic in the lowest-yielding non-premium passenger segments is being reduced, and cost efficiencies continue to be delivered".

In other words, BA is on track to implement its new strategy of getting rid of low-fare economy class passengers and focusing on high-paying business class travellers.

BA chief executive Bob Ayling said the results showed that "we are reading the market correctly and the trends are going in the right direction".

The past year has been difficult for the airline. Cheap fares and the rise in the price of oil has led many analysts to believe that the company will post a full-year loss of more than £200m.

Chris Tarry, an aviation analyst at Commerzbank, said the loss "was better than expected" and pointed out that "the main message here is yields which show the strategy is beginning to come through".

Andrew Light at Salomon Smith Barney agreed, saying he could not understand the drop in BA share prices.

The stock market gave a mixed response to BA's figures. After an initial surge to 325 pence, the share price fell back again, closing 3.24% lower at 299p.

BA shares have now lost 61% of their value since hitting a record 760 pence in May 1997.

Ian Wild of SG Securities, though, pointed to the "general background [...] of a sharply depressed, intensely competitive industry where too many aircraft are being delivered, there are too few passengers and the oil price is rising".

High-cost business

In the past year, BA profits have suffered due to overcapacity on the North Atlantic route.

The carrier is not alone in the problems it faces.

Last week, KLM Royal Dutch Airlines posted higher- than-expected third quarter losses of $17.3m.

Many airlines were hit hard by the Asian crisis, which prompted carriers to concentrate on putting more flights on the North Atlantic route, driving down fares as a result.

Even now Air France and Deutsche Lufthansa, among others, are still adding capacity.

"I think the competitive environment for them is pretty tough,'' said Martin Borghetto, an analyst at Morgan Stanley Dean Witter & Co. "BA is suffering more on the North Atlantic than competitors, because that's their most important route in terms of historical profitability.''

The emergence of cheap no-frills carriers, such as easyJet, has also made things difficult for BA, prompting them to set up its own cheap fare airline, Go.

Investors' lack of faith in the company is reflected in its share price.

Things can only get better

The good news for BA is that people now seem willing to pay more for their flights.

BA's strategy has centred on carrying fewer passengers, but charging them more.

It plans to reduce capacity by 12% in the next three years.

Initial signs are that this strategy is working.

In January, premium traffic was up 5.2% - the seventh consecutive monthly increase - while economy traffic fell 7.1%.

Encouraged by this data, BA announced on Thursday that it planned to raise economy and business fares on North Atlantic flights by 3% to offset high fuel prices.

It is also to create a new superior economy cabin, with prices 20% higher than regular economy class.

It is being introduced as part of what the airline describes as a £600m package of passenger improvements over the next two years.

Cutting costs

The other option open to chief executive Bob Ayling is to cut costs.

Already, Mr Ayling has announced that BA plans to cut operating costs by 12.5% by the end of the 2002 financial year.

Some of these - or future - cost cuts, could be achieved by reducing staff.

British Airways employs 64,000 employees and already speculation is that up to 10% of these positions could be cut.