BA’s Share Prices Fly South As Rising Fuel Prices Burns Profits.

As oil prices continued their upward journey and even went above 105$ during the past few days, British Airways [BA] shares have taken a beating and have decreased by 7% to 245p. The high fuel prices will also be accompanied by the cost that the airline will bear to move into Heathrow’s new Terminal 5. So, according to Mr. Willie Walsh, the chief executive of BA, he will be forced to forget about achieving a 10% profit margin for BA in the current year and might have to settle for around 7%.

With crude prices briefly touching the 105$ mark before settling down to 103$ and with predictions that in future, the prices might not reduce due to Opec’s reluctance to increase oil production to match the demand, the airline along with all other airlines, will have to bear the brunt of these unwanted costs. With the economies of developing countries such as India and China showing no signs of slowing down in spite of higher fuel prices, the level of price increases will be much higher than the decreases as the year goes by. The current years profits at around 10% will translate into an 870 million pound operating profits for BA on their total revenues of 8.7 billion pounds, which mostly resulted from earnings made during the previous summer.

With analysts predicting higher sales of around 9.1 billion pounds in 2008-09 the lowered profit margins of around 7% might result in a 635 million pound profit, which could mean that BA would witness a fall in its profits by around 25%. Their fuel bill itself would increase to around 2.5 billion pounds in the current year, which could mean an increase of 450 million pounds as compared to the previous year. This increased factor along with the high bill of around 200 million pounds to move into Terminal 5 at Heathrow airport will negate much of the increased business, which BA would be hoping to achieve from its Heathrow Operations. The move into Terminal 5 will also bring in an additional 35 million pound wage bill, which will be due to an increase in staff, which the airline had not considered in its budget and which it might have to let go in the coming months.

So, BA has watched around 2.8 billion pounds, which is about half of its market value get burned up due to the rising fuel prices in the previous year. Even though, it has managed to pass on around two thirds of the price increases to its customers, it still had to absorb the remaining one-third increase. The airline has increased fares 12 times in the past 3 years itself and has also indicated that more such hikes were in the way due to the northward march of crude prices. Mr. Keith Williams, BA's finance director said that the slowdown of the US economy would severely aggravate the predicted drop in its profits and added, "We’ve started the down cycle, particularly in the US." BA has predicted that even though its long haul economy and short haul business passengers are not coming in as per their targets, its long haul premium passengers are very much meeting their targeted returns. BA has managed to attract more business and premium flying passengers in February and has posted a 15% increase in passenger traffic for that month.

So, Mr. Williams prediction that oil prices touching 120$ per barrel and remaining at those prices in the future could shake up the entire industry, and could wipe out operating profits of not only BA but also those of other airlines. So, even though BA has posted decent profits for the current year, the certain rise in crude prices could put pressure on both BA’s profits as well as its share prices.