British Airways may raise fares despite record profits

26 May, 2008: British Airways, the national airline and flag carrier of the United Kingdom, is likely to raise fares.

This is in the wake of soaring costs of jet fuel and “an uncertain economic outlook” despite the airline having reported record profits, according to Willie Walsh, chief executive officer of British Airways.

According to media reports, Willie Walsh issued the “warning” even as British Airways, the third-largest airline in Europe, registered record profits of £875 million in 2007 and approved its first dividend since 2001.

Walsh said the airline would have to spend an extra £1 billion on fuel in 2008 if the price of crude oil remained around $120 a barrel. At present, crude oil costs around US $125, having gone up by about 30% in 2008 alone.

A statement from British Airways said that economies of the airline’s two biggest markets – the United Kingdom and the United States – are slowing rapidly. “This has already begun to manifest itself in a marked drop in non-premium transatlantic bookings.”

British Airways also raised its estimate for the fuel bill for 2008 to over £2 billion – which comes to almost double its previous annual total.

The website businessweek.com quoted Willie Walsh as saying: “The huge increase will unavoidably mean that it will push its fares higher. It is inevitable that these costs are going to flow through to the consumer.”

Many airlines – including easyJet, the low-cost airline based at London’s Luton Airport, and Ryanair, the Irish airline with headquarters in Dublin and its biggest operational base at London’s Stansted Airport – have introduced a range of new fees intended to offset their rising bills.

While the British airline Virgin Atlantic has imposed several fuel surcharges, a number of other airlines in the United Kingdom have filed for bankruptcy in the face of the skyrocketing operating costs.

However, British Airways has so far managed to take care of its margins through its charges as well as cost-cutting. But, CEO Willie Walsh’s warning means that the situation is going to change.

A spokesman for British Airways said the carrier would reduce its capital spending programme and predicted a meagre 3% to 3.5% increase in passenger numbers in 2008.

According to analysts, the “premium transatlantic bookings” will be crucial for British Airways since the airline makes earns most of its income from that customer group. However, “the spectre of recession in America looms larger than ever while the United Kingdom also heads into serious slowdown,” the website businessweek.com quoted Douglas McNeill, an analyst at Blue Oar Securities, as saying.

McNeill explained: “The year of plenty is going to be followed by a very lean year indeed. Sensibly, British Airways will respond by cutting on spending to conserve cash. It will also look to pass on higher fuel costs to customers-and the big unanswered question is whether that will cause them to stop flying in significant numbers.”

According to media reports, British Airways had, in April 2008, held talks with US carriers Continental Airlines and AMR Corporation’s American Airlines on forging a cost-saving alliance.

British Airways CEO Willie Walsh said on May 19, 2008, that “the impetus for a deal was coming more from the US side, as looming merger deals force carriers in the United states to rethink on their transatlantic alliances.”