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British Airways
A 47% increase in fuel costs saw British Airways report a 20% drop in operating profits for the last quarter (to December 2004). Turnover for the quarter increased by 4.3% due to a 49% increase in non traffic revenues (to £226m), passenger and cargo revenues were flat. Non traffic revenue is made up of aircraft maintenance, package holidays and other airline services. Operating cost growth in the quarter was 6.3% (almost entirely due to fuel costs), outstripping revenue growth and resulting in an erosion of operating margins to 5.6% compared to 7.3% in the same period last year.
The results for the nine months to December are still reasonable with a 3.8% increase in turnover to £5,924m and operating profits growing by 34% to £500m, although the decline in the quarterly performance does not auger well for the rest of the year. Performance in the second quarter was noticeably weaker than in the first and revenue growth in the second and third quarters has been almost entirely due to non-traffic revenue.
Revenue per passenger kilometre (RPK) improved to £6.2 (from £5.93 the previous quarter) although this was below the £6.32 achieved last year. Overall load factor for the quarter was up 1.2 points at 69.9%, and for the nine months up 2.1 points at 70.2%. Cargo volumes for the quarter (CTKs) were up 8.1% compared with last year, with yields (revenue/CTK) down 1.6%. For the nine month period, cargo volumes were up 12.9%, with yields down 6.3%.
Control of operating costs continues to be impressive. Excluding fuel costs, other operating costs for the quarter were (overall) almost unchanged from last year, a 10.2% cut in selling costs and a 7.4% saving in accommodation and ground equipment costs offsetting small increases elsewhere. For the nine months, operating costs were flat compared to last year, a 14.2% reduction in selling expenses offsetting cost increases elsewhere. The discipline in cost control is commendable but the continued reduction in selling costs does raise some concern that this may be coming at the expense of top line growth which has been flat this year. British Airways says it is on track to deliver £450m in cost savings by March 2005. Employee cost savings have been agreed with most unions and are expected to deliver a further £300m by October 2006.
The estimated increase in fuel costs for remains unchanged at £245m, a part of which is expected to be recovered in fuel surcharges, although the company is silent on exactly how much. It previously estimated this at £160m and this may mean cost recovery is proving to be more difficult than anticipated, only to be expected if yields continue to decline. Although oil prices have eased and forecasting prices is an inexact exercise current expectations are that it will settle at around US$40-45 per barrel in the medium term which is not good news for British Airways.
The company expects a small improvement in business during the next quarter and has revised its expectations of revenue growth to 3%-3.5% from the earlier level of 2-3% due to volume increases. Yields are expected to decline further and the company reports that all market segments remain price sensitive.
The stock trades at 270.5p on a prospective PE of 16.7× (for 2005), at the upper end of the sector range. The yield is marginal at 0.46%.
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