British Airways plc Ordinary 25p (BAY)

Company overview

British Airways is the once government owned national airline operator working primarily from its key bases at Heathrow and London Gatwick. Cargo includes not only passengers via its scheduled and charter air services, but freight, mail and the provision of ancillary services.

HL Update (1 August 2008)

The group’s recent first quarter results (01Aug08) again reiterated the extremely volatile nature of the airline industry. Pre-tax profits over the first quarter period fell by an eye watering 87.6pc to £37m, largely thanks to the £233m jump in fuel costs over the period to £706m. The group and its rivals have been left facing a potent combination of rising costs, at a time when consumer budgets are under severe pressure, effectively reducing demand for flights. Furthermore, British Airways added to its own difficulties given the extremely poor operational start to life which the new Terminal 5 at Heathrow endured.

However, there are still positives – operations at Terminal 5 have now begun delivering, new fuel efficient planes are on order and overall revenues for the group have risen, founded on higher ticket prices. Furthermore, discussions with Spanish airline Iberia provide hope of further cost savings longer term. Nonetheless, with the group’s situation having deteriorated so rapidly and management remaining extremely cautious for the outlook, market consensus opinion currently denotes a sell.

HL Comment (4 February 2008)

For long term investors in British Airways shares, the share price graph reads like a flight through extremely turbulent stormy weather conditions, with the price diving from over 750p back in May 1997 to under 100p in March 2003 and back up over 300p at the current time (Feb2008). The group has had to contend with the founding of low cost airlines such as EasyJet and Ryanair, Gulf Wars, Sars viruses, terrorist attacks in New York, the general threat of a global recession and now relatively high oil prices. Against such a difficult background, management has made profit progress via a serious of cost cutting programmes with costs being reduced by £450m between 2003 and 2005. Progress has also been achieved via a number of joint service arrangements with competitors such as Iberia and Qantas being taken on as partners in order to share costs and revenues on services to Spain and the Far East.

The group’s recent third quarter results (01Feb08) saw pre-tax profits in line with analysts’ expectations, coming in at £788m for the 9 nine month period and up from £584m over the same period 2006. Progress was led via a combination of continued cost cutting and retained strength in the group’s premium long-haul passenger services. However, a backdrop of historically high oil prices is causing the company difficulties, with the group suffering a 16pc increase in fuel costs over the third quarter - probably the highest increase the company has experienced over any quarter period, according to management. The company is also to launch a twice daily service to New York from London’s City airport and the opening of Terminal 5 at London Heathrow is only weeks away.

Acting for negative investor concerns are a cautious outlook comment from management, given uncertainty relating to fuel costs, and also worries over the health of the global economy, given the group’s exposure to high spending business travellers. In addition, there is also continuing aggressive competition from the low cost airlines and lingering concerns over terrorism, allowing for remaining geopolitical uncertainties. On the plus side, management continue to demonstrate their ability to cut costs, the expected move to the new Terminal Five should further reduce costs and the drive towards attracting higher paying business passengers appears to be working. On balance, whilst the shares remain relatively high risk given their volatility, market consensus is currently favourable in tone.

All yield figures are variable and not guaranteed.

Fundamental Data

Year Ending	Revenue (m)	Profit Before Tax (m)	EPS (p)	P/E Ratio	PEG	EPS Growth (%)	Total Dividend	Dividend Yield
31-03-2008	8,753.00	883.00	59.20	4.00	0.10	59.00	5.00	2.10
31-03-2007	8,492.00	611.00	37.20	13.10	n/a	(7.00)	n/a	n/a
31-03-2006	8,213.00	616.00	40.10	8.80	0.60	14.00	n/a	n/a
31-03-2005	7,772.00	513.00	35.20	7.50	n/a	n/a	n/a	n/a
31-03-2004*	7,560.00	230.00	n/a	n/a	n/a	n/a	n/a	n/a

* Prior to 31st March 2005, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).