Taxes and higher fuel costs to clip airline giant’s wings

British Airways parent International Airlines Group (IAG) yesterday said that higher UK taxes, economic problems in the eurozone and €1 billion (£850 million) of extra fuel costs will impact its performance this year.

The warning came as the company – created by the merger of BA and Spanish carrier Iberia – posted bumper pre-tax profits of €503m for 2011 as capacity increases combined with a drive to increase revenues per passenger. The year before, the two separate companies made €84m.

It said that while BA was profitable, Iberia is losing money because of the ongoing weakness of the Spanish economy. The Spanish airline also has higher costs than its British counterpart.

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IAG chief executive Willie Walsh said the bottom line was boosted by savings of €74m from the merger, much more than was originally anticipated.

But he warned that fuel costs remained a “significant issue”, up 29.7 per cent on the year before at €5.1bn. The current oil price and euro to dollar exchange rates will add more than €1bn to that total this year if they remain unchanged.

Walsh said the north Atlantic market, where BA operates, remains strong. But he argued that British aviation’s competitiveness was undermined by the UK government’s determination to continually increase air passenger duty (APD) with the latest 8 per cent rise due in April.

“In 2011 British Airways paid almost £500m in APD. As a result of the latest increase, the airline is reducing by around half the number of jobs it’s creating this year and has postponed plans to bring an extra Boeing 747 back into service,” he said.

IAG is in the process of taking over regional operator BMI, subject to regulatory approval. It plans to integrate the smaller business into British Airways and use some of its Heathrow slots to launch new long-haul routes to “growth economies”. Yesterday, it confirmed that the proposed deal would bolster BA services to Scotland as it takes on BMI slots, but could not give further details.

Broker Investec reiterated its “sell” recommendation on IAG, adding that it had placed its profit forecast and share price target for the company under review with the expectation that both will be downgraded.

“Management has signalled fuel costs €250m higher than our forecast and yield momentum has petered out,” it said.

Sheridan Admans, investment research manager at the Share Centre, said that while last year’s figures were “encouraging” against the backdrop of disruptions to British Airways’ operations caused by the volcanic ash cloud and strikes, investors should be cautious.

He said: “We remain concerned over austerity in Europe, higher fuel costs and the potential for more industrial action, all of which could weigh on profits in 2012. We continue to recommend investors ‘hold’ International Airlines.”