1st Feb 2008 07:00
British Airways PLC01 February 2008 INTERIM MANAGEMENT STATEMENT Period April 1, 2007 - December 31, 2007 (Unaudited) GOOD RESULTS DESPITE SOARING FUEL COSTS British Airways today (February 1) presented its interim management statementfor the nine months ended December 31, 2007. Period highlights: • Operating profit of £734 million (2006: £571 million) up 28.5 per cent • Operating margin 11.1 per cent (2006: 8.7 per cent) • Profit before tax of £788 million (2006: £584 million) up 34.9 per cent • Fuel costs up £72 million in third quarter • OpenSkies EU US airline launched • Terminal 5 - less than eight weeks to opening • New London City New York services to be launched British Airways' chief executive Willie Walsh, said: "This is another good set of results despite soaring fuel costs and difficultiesin the market. Revenue up some one per cent and a strong cost performance hasled to an operating profit up 28.5 per cent. While fuel costs in the first sixmonths were down £36 million, they have soared £72 million in the third quarter. The opening of Terminal 5 is now less than two months away and the public trialsand previews for our Executive Club members have been very successful. When itopens in March our passengers will be able to enjoy a calm and effortlessexperience. The suite of lounges will be the largest and most luxurious in theworld and will allow our passengers to work or relax in comfort. We have also launched our new airline OpenSkies as a result of the newtransatlantic air treaty. It will operate initially with one Boeing 757 non-stopbetween Europe and New York and offer business, premium economy and economyclass. It will complement our business not compete with it. We will also launch a new all business class niche service in 2009, linking thetwo largest financial centres of the world with flights from London City to NewYork on Airbus A318 aircraft. We are confident it will be a success as LondonCity airport is only a short distance from the heart of London's financialdistrict." Financial review Revenue was up by 0.9 per cent. Excluding exchange, revenue was up 3.2 per cent. Passenger revenue at £5.7 billion was up 1.7 per cent on capacity up 0.8 percent. Seat factor was down 0.6 points to 77 per cent. Yields were up 1.5 percent mainly due to more premium passengers travelling, although the gains werepartially neutralised by exchange rates, mainly the US dollar. Club World and First performed strongly, driving our overall 4.2 per centincrease in premium traffic. Shorthaul premium traffic has weakened andnon-premium traffic on the North Atlantic remains soft. Cargo performance is improving. Strong volumes from the Americas, UK and MiddleEast South Asia, resulted in a 1.6 per cent improvement in cargo tonnekilometres (CTKs). Revenue fell £20 million to £453 million primarily due toexchange rate movements. Our cost performance continues to be strong, helped by the weak US dollar.Total costs were down £101 million with unit costs down 1.5 per cent. Employeecosts fell by 6.9 per cent to almost £1.6 billion because of reduced pensionscosts and lower severance costs. Fuel was up 2.4 per cent due to the higher oilprices, only partially offset by hedging and the weak US dollar. Aircraft leasecosts were down 16.4 per cent as a result of fewer aircraft on operating leasesand renegotiation of existing leases. Engineering costs were up 11 per centbecause of higher freighter costs, price rises in maintenance and highervolumes. Handling charges, and other operating costs have risen by 3.4 per centbecause of the cost of dealing with baggage issues earlier this year. The financial position of the company remains strong. In quarter three we raiseda 15 year $1.7 billion aircraft financing facility and other financingfacilities totalling $1.6 billion. Cash at the end of December was £1.7 billion,£631 million lower than at March 2007 but within our target range. Our net debtwas £1.4 billion, up £457 million since the year end. Cash and net debt wereaffected by payments into the New Airways Pension Scheme (NAPS) and to the USDepartment of Justice (DoJ) for anti-competitive activity. Capital expenditure at £519 million was higher than last year because we tookdelivery of four new Airbus A321 aircraft and two new Airbus A320 aircraft. Wealso continue to invest in the new Club World cabin and Terminal 5. The tax rate for the nine months was 21 per cent. It benefited from a one-offcredit because of the reduction in the UK corporation tax from 30 per cent to 28per cent, effective from April 1, 2008. Excluding the one-off credit, the taxrate for the period would have been 30 per cent. Business review The airline continues to win awards including the World's Leading Airline at theWorld Traveller Awards, first prize for the new Club World seat at theInternational Design Awards in the US, Best Airline, Best Shorthaul, BestEconomy Class and Best Frequent Flyer Programme at the Business Traveller Awardsand Conde Naste Traveller magazine Best Leisure Shorthaul Airline. Following the incident at Heathrow in January involving one of our Boeing 777s,the aircraft has been written off by underwriters and the insurance claim agreedin full. There will be no material effect in the results. The flight and cabincrew and all staff involved were praised for their outstanding performance inthe incident. Bringing Terminal 5 Alive Our key business objectives focus on four themes, the first of which is BringingTerminal 5 Alive. T5 will open on time and on budget. Trials of all the newprocesses and equipment continue to ensure T5 will be a flagship for the UK. Basics and Brilliance Our second theme redefines our customer promise under the banner of BA Basicsand Brilliance - ensuring consistent high quality service 24 /7 and brilliancewhere it counts. Punctuality and baggage performance remain a challenge atHeathrow where facilities are old and overstretched. Heathrow was designed tohandle 45 million passengers but today looks after 67 million passengers peryear. Both these key areas will be improved significantly when we move to ournew home in T5 but, in the meantime, we remain focused on improving our currentperformance. In the air we have completed the new Club World fit of our fleet of 57 Boeing747s. Investing in Growth Our longhaul fleet order is fundamental to our third theme of Investing inGrowth. We have now formally signed the contracts for 12 Airbus A380 aircraftand 24 Boeing 787 aircraft and options for a further seven A380s and 18 B787s.The order allows for replacement of older aircraft and sustainable, profitablegrowth. A key factor in our choice of these aircraft was their environmentalperformance and they score highly on every measure. They are cleaner, quieterand more fuel efficient. We have ordered two Airbus A318 aircraft to operate our planned business onlyservices from London City airport to New York in 2009. We are always looking for opportunities to increase our slot portfolio atHeathrow and we have acquired seven daily slot pairs during the nine months. Ourshare of slots at Heathrow is 41 per cent. During 2007 we formed a consortium with TPG to explore a bid for Iberia. As aconsequence of the recent decision taken by Iberia's core shareholders to selltheir shares to Caja Madrid, the consortium withdrew its indication of interestfor the company. We have retained our 10 per cent stake in Iberia. By March our franchise agreement in the UK with GB Airways will end but we willbe launching services on some of the routes previously served by GB Airways.Our agreement with Loganair ends in October. Although historically successful,the franchise model has outlived its purpose in the UK. This decision does notaffect our overseas franchisees who continue to provide valuable feed trafficand brand exposure in areas we cannot serve. Achieving a Competitive Cost Base Our final and most enduring theme in recent years has been achieving acompetitive cost base. Improving cost efficiency and eliminating waste in ourbusiness is key to delivering our target of a ten per cent operating margin,which we are on track to achieve by March 2008. The CAA published its draft final consultation on the BAA Quinquennial (Q5)review of airport charges. The final decision on the price cap will be beforethe end of March with the new charges to be implemented on April 1, 2008. TheCAA has proposed that, at Heathrow, there is a 15.6 per cent increase in yearone of Q5. In the other four years of the charging period, the CAA proposes arise of inflation (RPI) + 7.5 per cent each year. The CAA has said that the increases reflect the increased costs of securityoperations, cost of recent capital projects and allowances for significantadditional expenditure. However, we believe investment should be in theinterests of the customer and the right controls should be in place to ensuregreatly improved levels of service, following the Competition Commission'spublic interest finding against BAA's performance. We are sure this could be achieved without the excessive price hike that the CAAis proposing compared with the detailed recommendations from the CompetitionCommission. Corporate Responsibility The Government launched its three-month consultation on a third runway andmixed-mode for Heathrow in November last year. We are very strongly in favour ofincreasing runway capacity at Heathrow which we believe would generate £7billion a year in national economic benefits. Mixed mode would generate anadditional £2.5 billion a year. By the time a third runway could open, aviation's carbon emissions will becapped under the EU Emissions Trading Scheme (ETS). This means that any growthin aviation emissions resulting from extra flights at Heathrow or any otherEuropean airport must be matched by equivalent emissions reductions elsewhere.So there will be no increase in overall emissions as a result of a third runway. The EU Environment Council endorsed the Commission's plan to impose the ETS onforeign airlines flying into and out of the EU from 2012. This means a one-yeardelay to the start of the scheme and the loss of the opportunity to beginemissions trading on an intra-EU basis only. We are concerned that the revised approach may provoke significant internationalopposition and so lead to further delays in implementation. Nonetheless theCouncil's agreement does preserve a number of the features of the Commission'soriginal proposal, and is a more balanced and reasonable position than thatrecently adopted by the European Parliament. We have taken climate change very seriously for a long time. More than a decadeago we were the first airline to set a target for improving fuel efficiency andwe led the way in advocating carbon trading. We have set a new target to improve our aircraft fuel efficiency by 25 per centby 2025 and we have relaunched our online passenger carbon offset scheme onba.com to make it simpler and easier to use. On waste minimisation we aim torecycle half of our waste and phase out use of landfill by 2010. In readiness for the move to Terminal 5, we have taken delivery of 38 newairport buses, which comply with the latest Euro 5 exhaust emission standards. Trading Outlook Our revenue guidance for the full year continues at 3 to 3.5 per cent in spiteof weakness in shorthaul premium and some non-premium markets. Longhaul premium traffic continues to be strong, supporting our decision to makemore premium capacity available. We have seen some fall in non-premium bookingsin the January booking period compared to last year. Our fuel costs will continue to rise and are now expected to be up more than£100 million on last year. This year's increase will be offset by reductions inother operating costs but our ability to mitigate rising fuel costs next yearwill be challenging. We continue to focus our efforts on achieving a 10 per cent operating margin forthis financial year. Note to Editors: There will be a webcast of an analyst conference call and slide presentation at2pm (GMT) available through our website www.bashares.com. Appendix Financial Position and Performance for the nine months ended December 31, 2007 Continuing Operations (Unaudited) Nine months ended December 31 2007 2006 Change Restated Revenue £m 6,622 6,560 0.9% Operating profit £m 734 571 28.5% Profit before tax £m 788 584 34.9% Loss from discontinued operations £m (4) (81) 95.1% Profit after tax £m 623 509 22.4% EBITDAR £m 1,428 1,278 11.7% Net assets £m 3,147 2,490 26.4% Net debt £m 1,448 866 (582) Cash & cash equivalents £m 1,724 2,643 (34.8)% Basic earnings per share P 53.3 43.8 21.7% Cash (out)/in from operating £m (12) 608 (620)activities Passenger revenue per RPK P 6.59 6.49 1.5%* *Increase VLY includes 2.4% due price, 1.9% due mix, (2.8)% due exchange Certain information included in these statements is forward-looking and involvesrisks and uncertainties that could cause actual results to differ materiallyfrom those expressed or implied by the forward looking statements. Forward-looking statements include, without limitation, projections relating toresults of operations and financial conditions and the Company's plans andobjectives for future operations, including, without limitation, discussions ofthe Company's Business Plan programs, expected future revenues, financing plansand expected expenditures and divestments. All forward-looking statements inthis report are based upon information known to the Company on the date of thisreport. The Company undertakes no obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, future eventsor otherwise. It is not reasonably possible to itemize all of the many factors and specificevents that could cause the Company's forward looking statements to be incorrector that could otherwise have a material adverse effect on the future operationsor results of an airline operating in the global economy. 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