Bottom Line: BA ready to climb

IN EUROPE there are still too many aircraft chasing too few passengers, even fewer of whom are prepared to pay premium fares, and British Airways did itself few favours by booking in a 14.5 per cent increase in capacity this summer, prompting May's pounds 442m rights issue.

But yesterday's interim results, showing a 26.5 per cent rise in second-quarter pre-tax profits to pounds 175m, show just how effectively, pace Richard Branson and with the help of devalued sterling, its marketing skills have mopped up most of the extra seats.

The stock market was initially more interested in a pounds 29m non-operating loss in the second quarter that stemmed almost wholly from BA's 49 per cent stake in TAT, the French airline, although Deutsche BA was also in the red.

TAT, a key if increasingly expensive element - along with Deutsche BA - in BA's expansion plan, is embarking on a remedial restructuring programme. But after the shambolic climb-down by the French government over cost-cutting at Air France, it might be rash to expect swift short-term action.

Fortunately BA is shielded from heavy losses at USAir through its holding of preference shares. Qantas, at least, joins BA as one of the few currently profitable airlines.

Surplus capacity has been a drag on BA's figures. Growth in revenue passenger miles failed to keep pace with the rise in available capacity, forcing BA's passenger load factor down 1.2 percentage points to 76.4 per cent. This is, however, an improving trend since the half-year load factor is down 1.8 points.

The key to BA's progress is cutting unit costs and boosting the yield from each passenger. Sterling's devaluation has exerted a two-way pull.

Productivity rose 8.5 per cent, outweighing a rise in employee costs of 6.6 per cent, and unit costs, which rose by 3.6 per cent, would have fallen by 5 per cent at constant exchange rates had the pound's decline not forced up dollar-denominated fuel costs.

On the other hand, devaluation has had a substantial effect on yields. At constant exchange rates, passenger yields in the first half were running 5 per cent below the same period last year.

But sterling's fall meant that they rose by 5 per cent, including a 7.2 per cent rise in the second quarter when premium priced traffic rose by 2 per cent, its first increase since August last year.

Competition on pricing remains tough but the outlook for capacity looks a lot less forbidding. BA has bent its mind towards improved utilisation of its existing fleet and is aiming for a 6 per cent improvement this year, equivalent to saving pounds 750m on new aircraft.

During the second quarter alone BA cancelled options on 23 Boeing aircraft, while retaining options on another 104, which will take further pressure off surplus capacity in the marketplace. After this year's binge BA plans to increase capacity by about 5 per cent next summer, or slightly more than its competitors.

This looks a lot more manageable and could set the stage for a rapid rise in profitability in 1994 and 1995. A yield of 4 per cent at 397p, following an 8.5 per cent rise in the interim dividend, is attractive.