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Sun, 06 Feb 2000, 2:17pm EST

British Airways Seen Posting an Operating Loss as Fares Drop and Oil Rises By Andrea Rothman

British Airways Expected to Post Loss as Fares Drop, Oil Rises

London, Feb. 6 (Bloomberg) -- British Airways Plc probably slumped to an operating loss in the third quarter as airlines cut fares in a struggle to win passengers on North Atlantic routes and fuel costs rose, analysts said.

Europe's biggest airline is likely to announce tomorrow an operating loss of about 43 million pounds ($68 million) for the quarter ended Dec. 31, after an operating profit of 92 million pounds a year earlier, according to the consensus estimate of four analysts. They expect a pretax loss of 72 million pounds, little changed from the year before.

British Airways also may post its first net loss for the full year, analysts said, mainly reflecting price cuts on flights from London to North American cities that drove revenue per passenger down by more than 5 percent in the fiscal first half. Still, the worst may be over as BA reduces capacity. ``This should be seen as the turning point,'' said Chris Tarry, an analyst at Commerzbank AG in London who rates BA a ``buy''. The January passenger traffic figures, reported Feb. 3, were ``quite good'' and indicate a sustained rebound, he said.

First- and business-class passenger traffic rose 5.2 percent in January, the airline said, marking the seventh straight monthly increase in passengers who pay higher fares -- the market BA Chief Executive Robert Ayling is targeting.

Overall passenger traffic fell 5.5 percent, as did seat- occupancy rates, down 2.7 percentage points to 60.9 percent. Those figures aren't a concern, analysts said, as they reflect a planned reduction in economy-class passengers. BA is flying smaller planes on many routes.

Shares Drop

British Airways stock has lost 58 percent of its value since a record 760 pence in May 1997, and fell 5 percent Friday to close at 309, valuing the company at about 3.3 billion pounds. The shares have fallen 20 percent in the past 12 months, pacing a similar decline in the FTSE All-Share Transport Index.

When British Airways reported in November that second-quarter profit slumped 86 percent, the carrier also said it expected cost cuts and a pickup in business-class travel to help reverse that, predicting conditions would improve by mid-2000.

Analysts believe that is happening now, even as competition remains tough over the Atlantic: Air France SA and Deutsche Lufthansa AG, among other competitors, are still adding capacity, even as BA and KLM Royal Dutch Airlines NV shrink. ``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 shift in strategy to business travel ``is the right thing for them to do,'' he said. They've got too much capacity.''

Capacity Cuts

BA's goal now is to reduce capacity by 12 percent in the next three years, partly by flying smaller planes more frequently, to attract more business travelers.

Rising fuel prices are also expected to have hurt BA in the third quarter, though not to the extent they did KLM. At the Dutch airline, a 41 percent jump in the fuel bill produced a net third- quarter loss that was four times the year-earlier figure, and 50 percent worse than estimates.

Tarry of Commerzbank said BA bought futures contracts covering 95 percent of its fuel needs, locking in lower prices for the rest of the current fiscal year. The airline is 50 percent covered for the 2000-2001 fiscal year, he said.

The average market price for jet fuel in the October-December quarter was 68 cents a gallon, compared with 39 cents in the same period a year earlier.

BA has already said it will report a one-time gain of 58 million pounds from the sale of shares in Equant NV, a Netherlands- based data-network operator, analysts said. The company also will take a 50 million-pound charge for the revaluation of yen loans, compared with a charge one year earlier of 117 million pounds.

Job-Cuts Charge

The airline may also take a charge for job cuts, analysts said. BA previously said it is eliminating 1,000 jobs, and the company hasn't contradicted reports that it could cut as many as 6,500 in the next three years.

If there are charges for jobs cuts, they are likely to be around 30 million pounds, said Andrew Light, an analyst at Salomon Smith Barney. He rates the shares ``outperform,'' based on a forecast recovery and ``strategic potential.''

Given forecasts by KLM earlier this week that the 2000-2001 fiscal year will be difficult, investors will be looking for a prediction from BA on Monday. ``They're still talking about being cautious in the short- to medium-term,'' Borghetto of Morgan Stanley said, ``even if they are seeing better figures on premium traffic.''

The airline ``will try and pump everything they can into costs'' in reporting earnings, so it can show a marked improvement as the industry recovers. He rates BA shares ``neutral.'' ==========================

-- Dee (t1colt556@aol.com), February 06, 2000

Answers

Hot stock pick of the week, pollies! BA is losing money! BUY ALL YOU CAN! Its stock will be going through the roof now, 'cause it's the new economic paradigm!

This post on BA's economic situation couldn't have been any better timed or placed to point out the contrast between real economic activity and realities and the BS that passes for the "new paradigm economy" as seen in the threads below.

The new economy fans can sell each other bubble.com certificates for digital dollars all day long. But in the end they'll have to step outside the heavily guarded Stock Exchange and deal with the rest of the world.

How long before they'll be trying to trade fistfulls of those certificates for a gallon of gas?

WW

-- Wildweasel (vtmldm@epix.net), February 06, 2000.