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British Airways profits rise

British Airways' [BAY.L] resurgent financial performance for fiscal 2003 has restored some much-needed confidence in the carrier. However, soaring fuel prices and no frills competition could undermine its efforts. The airline should aim to offer good value to customers who are prepared to pay a little more to get frills instead of engaging in a hazardous price war.

British Airways (BA) has recorded encouraging results for the year ending March 31, 2004. The company reported a pre-tax profit of GBP230 million, a 70% jump when compared to 2003. The main driver of the airline's return to profit has been the cost cutting measures implemented under the "Future Size and Shape" strategy, which generated better than expected savings of GBP869 million against the forecasted GBP650 million.

Beside the cost reduction plan, BA benefited from a gradual recovery in passenger volumes especially on the transatlantic routes. The UK airline stated that its long haul first and business class operations are improving steadily, but the short haul premium segment remains weak. Therefore, despite improved profits, BA's business plan is still focused on cutting costs, which may entail additional job cuts and the abandonment of more unprofitable short haul routes.

Most recently, BA has been badly affected by rising oil prices that have forced the carrier to introduce a GBP5 surcharge on return flights. Since 'no frills' rivals such as Ryanair have stated that they do not intend to add similar surcharges, this will worsen the already fierce competition on routes to European cities. In addition, of all the major European airlines, the UK flag carrier is considered one of most susceptible to higher fuel prices due to its limited hedging activities against fuel price fluctuations.

Following a difficult period in the wake of September 11, BA has achieved a remarkable turnaround. However, as well as the rising cost of fuel, BA will have to be wary of the likely impact of increased landing charges and higher pay and pension contributions on next year's bottom line. Even so, BA's management should continue to play to the airline's strengths as a quality full-service carrier offering reliable service to major centers. It can still offer good value fares without directly taking on the low-cost carriers, thereby remaining profitable in the potentially tricky years to come.

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