<font face="Verdana, Arial, Helvetica" size="2">BA set for heavy weather
By Mark Odell
Published: June 20 2001 18:39GMT | Last Updated: June 20 2001 19:21GMT
British Airways' short term outlook took a turn for the worst on Wednesday after Merrill Lynch said it was cutting its profit forecasts by more than 40 per cent for this year as the prospects for the airline sector continued to look bleak.
Merrill Lynch, one of the airline's two house brokers, said it was lowering its pretax profit forecast, before exceptionals, from £256m ($358m) to £150m for the current year to the end of March 2002, and by 15 per cent the next year.
The earnings downgrade will come as a blow to BA, which has received widespread praise for its strategy of cutting capacity to focus on more profitable business traffic. In May, the airline reported pre-tax profits of £150m, up from £5m a year earlier, which was its worst performance in 18 years.
At the time of the results in May, Rod Eddington, BA's chief executive, warned that the economic slowdown, the impact of the foot-and-mouth and continued high fuel costs were beginning to affect business.
But Merrill Lynch said the outlook for traffic growth, mix and pricing had since deteriorated with the additional "unexpected phenomenon" of a snowballing of big pay rise demands from airline pilot unions, the most powerful labour force in the industry. BA will start negotiating new contracts with its pilots later this year.
"Most importantly, no carrier is yet reporting to have identified any stabilisation in these trends, let alone a turning point," Merrill Lynch said in a research note.
The broker said it was now forecasting BA's traffic to fall by 10 per cent year-on-year, after a 20 per cent slump in April and May across the North Atlantic, the airline's main source of profit.
The downgrade in BA's earnings follows a series of profit warnings from the big four US airlines in last few days. The slowdown in the US economy has hit US carriers much harder than expected. In the past two weeks, Merrill Lynch has downgraded its forecasts this year for the US airline industry as a whole from a net profit of $570m to a loss of $750m.
"The trends seen in the US industry appear to be manifesting in Europe with a lag of 3 to 6 months," the broker said.
BA's shares, which have fallen more than 10 per cent in the last two weeks, closed 5 pence lower at 329p.
Source: FT</font>