August 6, 2008

Airlines Report Falling Profits and Passenger Numbers

By Sarah Arnott

It was another gloomy day for the global airline industry yesterday as British Airways revealed depressed passenger numbers for what should have been one of the busiest months of the year, and two European carriers posted disappointing financial results.

But BA's share price remained buoyant and closed up 5 per cent at 267.75p, on the back of oil prices hovering at the $118-mark (60) compared with the all-time high of $147 a barrel last month.

Despite 3.5 per cent more capacity on BA's flights this July compared with last, the number of actual passengers was down by 3 per cent to just more than three million. The revenue passenger kilometre figure - which accounts for both seat sales and how far passengers flew - was also down, by 3.5 per cent, and only 75.8 per cent of available tickets were taken, compared with 81.2 per cent in the same period last year.

The falling numbers came as no great surprise. Last week, Willie Walsh, the BA chief executive, warned that the industry faces the "worst-ever" trading conditions as the company reported an 88 per cent slump in profits in the first quarter and revealed plans to cut flights.

The aviation sector is caught in a nasty bind. Fuel costs continue to inflate, rising faster than the increases in ticket prices that saw BA's passenger revenues up by 3 per cent in the first quarter. But hiking up prices puts off potential travellers - as illustrated by the 4.1 per cent year-on-year fall in BA's non- premium traffic in July.

The only good news is that the company is managing to hold on to sales of premium tickets in Business and First Class - July even saw a 0.4 per cent rise.

"Market conditions for the industry remain very difficult on the back of high oil prices and a weak economic environment," the company said yesterday.

"Long-haul premium remains broadly flat versus last year while non-premium bookings remain most sensitive to price changes."

Those higher-paying customers are crucial, according to Gert Zonneveld, a transport analyst at Panmure Gordon. "Roughly half of BA's revenues come from premium tickets so it is a very important profit generator, particularly with the current economic weakness and plummeting consumer confidence," he said.

Oil prices and fuel costs are aviation's biggest problem. BA's fuel bill in 2005/6 was around 21 per cent of its total cost base. For the financial year to March it was 26 per cent, and the expectation for 2008/9 is rising to 33 per cent.

"It is going up by 12 percentage points in the current financial year, which is more than the total operating margin of the company," Mr Zonneveld said. "That is a challenge for the aviation industry which it can't match by raising ticket prices."

But just as oil price falls push airline stocks up, so they are vulnerable in reverse. "If or when oil jumps up again, airline shares will come down just as fast as they are now going up," Mr Zonneveld said.

BA is not the only airline to be suffering. Air France-KLM, the French-Dutch carrier which is the world's biggest by revenue, yesterday announced first-quarter profits down 59 per cent to $168m (133m), despite revenues up 5.8 per cent to $6.2bn. The Air France fuel bill rose by 24 per cent year on year, and it is now anticipating a full-year bill of $5.86bn.

Iberia, the Spanish group, published equally gloomy half-yearly figures. Fuel costs shot up by a massive $199.5m, even as other operating expenses fell by $93.5m. While revenue remained flat, the company made a loss of $3.99m for the second quarter and $32.3m for the half-year.

BAA sues Ryanair in row over landing fees at Stansted

BAA has filed a High Court action against Ryanair over millions of pounds of landing charges that the budget airline has refused to pay at Stansted.

The airports operator has turned to the courts after failing to settle a row with Ryanair that began in April, when BAA said it would raise landing fees at Stansted from 5.50 per passenger to 5.88.

While the fee increases leave BAA's charges below the maximum allowed by the Civil Aviation Authority, the industry watchdogs, Ryanair and other airlines have criticised the rises as unwarranted. Ryanair has refused to pay the additional levies, while fellow budget carrier easyJet also withheld some charges for a period but is now taking legal action against BAA instead.

A BAA spokesman said: "For some time, Ryanair has enjoyed substantial discounts in charges for using Stansted Airport. This arrangement no longer applies, but our charges remain within the limit we are allowed to charge by our regulator."

A spokesman for Ryanair said the airline planned to fight the BAA action. Both it and easyJet plan to reduce flights at Stansted, which will reduce BAA's earnings.

David Prosser

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