Warning on sterling hits BA shares

British Airways shares fell sharply yesterday as the airline warned that the strength of sterling could knock more than pounds 100m off its profits this year.

The warning, combined with signs of mounting industrial unrest among BA staff and a lack of any firm news on its transatlantic alliance with American Airlines, took the gloss off another record performance last year as pre-tax profits reached a new peak of pounds 640m.

Sir Colin Marshall, BA's chairman, said it was a source of frustration that the tie-up with American was still awaiting approval from Whitehall, Washington and Brussels almost a year after it was first unveiled.

Both Sir Colin and BA's chief executive, Bob Ayling, contrasted the delays with the way Lufthansa and United were forging ahead with their Star alliance and said that it was essential for the partnership with American to be approved so the two airlines could compete on an equal basis.

However, Mr Ayling gave little indication that BA was close to getting the green light from the new President of the Board of Trade, Margaret Beckett, saying merely that BA was "picking up the threads" with the new Government in the expectation that a decision would be reached with all due despatch.

Last year's 9 per cent climb in profits was struck after BA took an exceptional charge of pounds 127m to cover redundancies resulting from its business efficiency programme under which BA has so far identified savings of pounds 600m out of the target of pounds 1bn. At the same time it wrote pounds 125m back into the profit and loss account after revaluing its stake in USAir at its original cost.

The sale of the 24.6 per cent shareholding is expected to raise around $500m (pounds 305m) against the $400m BA originally invested. At the operating level profits fell by pounds 55m from pounds 728m in 1995-96 to pounds 673m last year. The reduction was largely due to a steep rise in fuel prices this year which cost BA pounds 142m.

In the current year, the biggest drag factor on BA is likely to be the strength of sterling. Derek Stevens, BA's finance director, said that currency losses could run into three figures.

Mr Ayling all but ruled out following the lead of American and Delta in the US and signing an exclusive supply deal with Boeing to purchase all its aircraft on a long term basis - the source of trade friction between Europe and the US.

Investment column, page 22