More on British Airways
British Airways: FY 2006 results
British Airways has maintained its strong run of form, reporting good results for the year to March 2006. The company has succeeded in growing revenues faster than costs, hence the improved results.
Total revenue rose 9.6% (to £8.5bn) in the year while total operating costs rose 8.2% to £7.2bn) resulting in operating margins widening to 8.3%, up 1.1 points from last year.
Group pre-tax profits the year reached £620m, up 20.9% from the £513m recorded last year.
The big cost increases were in fuel & oil (up 65.1% in Q4, up 44.7% for the year) and aircraft operating lease costs (up 20% in Q4, 5.7% for the year). Revenue growth was steady, passenger revenues growing 4.9% and cargo revenues growing 3.3% for the year. Another item of revenue, described in the accounts as ‘other revenue’ has shown a sharp increase (up 51.5% to £1,197m).
No details are available as to what this other revenue comprises of but our guess is that this represents fuel surcharges levied on passengers and cargo. BA’s fuel costs have risen by £504m during the year while ‘other revenue’ has increased by £407m. The company has reportedly added seven fuel surcharges to tickets since May 2004.
Operational metrics have improved with passenger yields (excluding fuel surcharge) -a measure of average ticket prices, increasing by 1.3% for the full year; seat factor was up 0.8 points at 75.6% on capacity 2.6% higher in ASKs. Cargo yields, excluding fuel surcharge, rose 3.8% despite a 0.4% drop in volumes. Cargo load factors remained steady at 69.7%.
The company’s success is largely due to its high volume of business and first class, premium travellers, who are generally less price conscious than budget holidaymakers. This has allowed the company to keep pushing up prices without suffering a loss in volumes. In this, they have been helped London’s position as a financial centre. Around 60% of the company’s revenue is thought to be derived from transatlantic flights, mostly used by businessmen.
The ability to keep passing on cost increases, coupled with stringent cost control (the company slashed agents costs in Q1, amongst other cost cutting measures) has enabled the company to deliver superior performance.
The risks to earnings come from fuel costs and from a possible slowing of the economy, which may slow growth in business travel. The presence of low-cost airlines keeps prices at the lower end of the market under constant pressure.
The company is optimistic in its outlook and has raised its revenue growth forecast for next year to 5%-6%, up from their previous estimate of 4%-5%, but medium term prospects are a little harder to predict.
The share trades at 343.5p, on a prospective PE (2007 earnings) of 7.5x, at the lower end of the sector range with a yield of 0.6%
Random picks: Amvescap | BP | GCap Media | Intercontinental Hotels | N Brown | Prudential | Redrow | Workspace | Dana Petroleum | Capita