BA could fly higher, but fasten your seatbelt

No rush to check in at De Vere; Expro International looks too dear

British Airways looks to be back up above the clouds. After a grey three months in the mid-cap index, investors are already betting the airline will rise back into the FTSE 100 when it is reshuffled next week, although the travel market remains subject to global economic and political uncertainty.

There was good news yesterday on passenger numbers, with November showing the third consecutive month of improvement after more than 18 months of falls. The outlook for revenues, BA said yesterday, has stabilised – but of course, the travel market remains subject to global economic and political uncertainty.

And there seems a growing mood of optimism in the City that BA will be able to trade its way out of the financial difficulties that threatened to engulf it after the attacks of 11 September – but remember, the travel market remains subject to global economic and political uncertainty.

This phrase, used in the trading update yesterday, is key to any investment decision on BA. The economic uncertainty is how long the slump in corporate travel and transatlantic deal-doing will continue. The political uncertainty is covered in detail nearer the front of this paper. With a UN deadline on Sunday that could signpost a new Gulf War, cautious investors will remember the slump in travel during the last conflict and be tempted to leave BA shares in the departure lounge for a while.

But fortune could well favour the brave. On many historic measures, BA is trading at rock bottom valuations, even after its modest recovery last month. It is getting a grip at last on the threat from no-frills carriers; offering "cheap frills" flights of its own and improving its internet booking systems. It has cut capacity on long-haul routes and is cutting costs throughout the organisation. Cash generation is alrady sufficient to produce a reserve in case of a prolonged Gulf conflict and should recover further next year now that planned spending on refits is coming to an end.

A price-earnings ratio of 5 on consensus 2004 forecasts already factors in big downgrades. If things in fact beat forecasts, the shares will fly.

So buy – but do observe the "fasten seatbelts" sign.

No rush to check in at De Vere

As the last scion of the Greenalls family to retain an involvement in the old leisure empire, Lord Daresbury must be relieved at how well business has held up in his De Vere hotels group. From his vantagepoint as non-executive chairman, the former Greenalls boss has watched the upmarket hotels chain prosper while rivals have stumbled amid the industry's worst downturn in a decade.

The secret to the group's success – in both its De Vere and Village brands – has been a push to woo British holidaymakers in order to compensate for the drop in bookings from business. Guests are drawn by the lush locations, many of which include a golf course.

While occupancy levels were down, the determination of Paul Dermody, the chief executive, to maintain the company's brand image by refusing to slash room rates meant that revenue per room (the key benchmark for the sector) was up, outperforming a provincial hotel market that was down by 2.9 per cent.

Even Greens, the group's 14-strong health clubs chain, managed a strong performance, with a maiden operating profit of £1.3m.

Though commentators tipped De Vere's independent future to be short following the sale of Greenalls' remaining pubs in 1999, the mooted bid has never materialised. This leaves the group, which reported full-year pre-tax profits before exceptionals of £37.7m, up from £33.6m, vulnerable to the diminishing spending power of the UK consumer. The shares, at 283p, could prove equally vulnerable. Avoid.

Expro International looks too dear

Shares in Expro International, an oilfield services group, have slipped almost as badly as Lord Browne's halo – and the two are connected. As the fêted BP chief executive has been forced to revise down his company's ambitious oil and gas production targets, so investors have feared that there will be less business around for Expro, which provides services to help the oil producers develop, improve and clean up their wells.

Certainly the outlook is cloudy, and interim results yesterday flagged a difficult second half. Last year's collapse in gas prices deterred work in North American gasfields and held back revenue growth. Pre-tax profit was up 46 per cent to £11.8m, though the underlying improvement was more moderate.

The oil price remains high, but this includes a "war premium" that may not last when hostilities commence and economic weakness means poor demand. The major oil groups are behaving cautiously. Some have signalled that the market needs to be less obsessed with production targets – code for "we have plans to cut ours". Expro will pick up some new business from the majors' need to siphon every last drop from existing fields, but it looks as if growth is slowing. At 352.5p, the shares are on a forward multiple of 12, which is not cheap enough. Avoid.