Page last updated at 16:12 GMT, Friday, 31 July 2009 17:12 UK

British Airways makes 148m loss

A BA plane
The economic downturn has hit demand for air travel

British Airways has reported a pre-tax loss of £148m ($245m) in the three months to the end of June.

This compares with a profit of £37m in the same period last year. Its operating loss of £94m compares with a profit of £35m last year.

Its losses come in the middle of a tough year for airlines as passengers cut back spending in the recession.

"Trading conditions continue to be very challenging," Willie Walsh, the airline's chief executive, said.

"While traffic volumes are down considerably compared to last year, they have stabilised during the quarter and show some signs of improvement for the peak summer months," he added.

This hope that the worst may be behind the company boosted its shares. It was the biggest riser on the FTSE 100, up 6%, closing at 142.4 pence.

Revenues fell 12.2% to £1.983bn in the quarter.

We're cutting forecast capital expenditure by 20% this year from £725m to £580m, and it's likely to remain at the same level this year
Willie Walsh, BA chief executive

Passenger revenue fell 12.5% while the worldwide decline for airfreight has also hit its cargo business, where revenues were down 28.1%.

Other airlines including Air France-KLM and Lufthansa, which this week reported falling revenues, have also been hard hit by the slowdown.

Air France-KLM lost 496m euros in the second quarter, compared with a profit of 149m euros for the same period last year. Lufthansa earned 40m euros in the same period, compared with 337m a year ago.

Staff cuts

BA has faced possible industrial action over its efforts to cut costs and staffing numbers. The chief executive has previously said that its drive to save cash was part of a "fight for survival". In June, he asked thousands of staff to work for free for up to one month to keep the airline in business.

The airline had cut staff by 1,450 since the end of March through "reduced overtime, increased part time working and targeted voluntary redundancy", he said.

A "permanent structural change" to its employee cost base was "essential to our short-term survival and long term viability", Mr Walsh said.

The airline should meet its cost-cutting targets, he added.

"Our engineers and pilots have voted for permanent change. This is a great step forward. Talks with other union groups continue. We're cutting forecast capital expenditure by 20% this year from £725m to £580m, and it's likely to remain at the same level this year," he added.

Negotiations continue with unions representing cabin crew and ground staff. They are currently in a cooling off period.

Total operating costs are down 6.6%, but "with revenue still weak, there is much more to be done", he added.

While trading conditions remain difficult for BA and other airlines, the company will be helped by easing fuel prices.

It said that its fuel bill, which is closely tied to oil prices, was expected to be between £450m and £500m lower this year than last year.

The company told the BBC that 70% of its fuel is hedged for the full financial year at $71 a barrel. The price of a barrel of Brent Crude is currently $69.21.

The company recently raised about £600m to shore up its balance sheet.

Not out of the woods

"British Airways has had a tough twelve months and the results today show that its far from out of the woods," said Saj Ahmad, an airline analyst, at Gerson Lehrman Group

"Critical cost cutting can really only come if it manages to successfully negotiate a deal with unions and staff on reducing headcount - only 2% of staff elected to work for free. That's saved some money, but not enough to start a turnaround," he added.

"The longer it takes to restructure, the likelihood of more deeper cuts to its staff base and as a result will damage its reputation for customer service - which its entire business model has been based upon."

Manoj Ladwa, a senior trader at ETX Capital, said the numbers from British Airways made "grim reading".

"They are pulling out all stops in order to remain viable as a business but an uncertain economic outlook, a pension deficit and delayed merger talks are factors that are going to weigh on the economy for the foreseeable future," he said.

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