BA shares tumble after Madrid attacks and warning of cost rises

British Airways shares tumbled yesterday in the aftermath of the Madrid bombings and a warning from the airline that it is facing £300m to £400m of extra costs this year.

Amid fears that the Spanish attacks could herald a fresh surge in global terrorism, BA shares dropped 8 per cent.

The markets were further spooked after BA told an investor presentation that cost "headwinds'' could cancel out a large chunk of the savings the airline expects to make over the next 12 to 24 months.

John Rishton, BA's finance director, said the extra £300m to £400m of costs was made up of higher pensions, pay, landing charges and fuel costs.

BA hopes to offset these cost pressures through a 2 to 3 per cent increase in revenues in the coming year, worth £200m. This would reverse a trend of falling sales which has seen £1.9bn lopped off BA's income since the attacks of 11 September, 2001.

BA's chief executive, Rod Eddington, said he thought about half the drop in the share price was a reaction to the Madrid outrages and half was due to concerns about the cost pressures the airline is facing. "The bombs in Madrid remind us that this is a vulnerable game to be in, albeit they weren't aimed at aviation,'' he added.

Despite the rising costs BA expects its Future Shape and Size initiative to save the airline £900m against an original target of £650m. It has also recently announced a further £300m of cost-savings over the next two years which are expected to lead to about 3,000 job losses in addition to the 13,000 achieved under Future Shape and Size.

Mr Rishton said BA was aiming to bring its debt down from £4.4b to about £3b over the next two years through greater cash generation.

BA hopes that by April next year 100 per cent of its tickets will be issued electronically against a current figure of 55 per cent. It is also aiming to increase the proportion of online sales from 15 per cent now to above 20 per cent by 2005 and 35 per cent by 2006-07.

But even then BA still expect 50 per cent of its revenues to come through travel agents because of the huge number of corporate customers it has. "The reach of travel agents is incredibly important in markets where you are not well known,'' BA's head of e-commerce, Simon Parks-Smith, said.

One of the new initiatives being introduced this summer is a facility for passengers not only to book tickets on the Internet but also print their own boarding passes, complete with seat number, from their home computers. This will enable customers with only hand luggage to bypass check-in altogether and go straight to the departure gate. For passengers with hold luggage there will be a "quick drop-off point'' for depositing bags.

Mr Eddington said BA was in no hurry to order new aircraft. But he indicated it was interested in the long-range version of the 250-seat Boeing 7E7, likely to enter service in 2010 as a replacement for its 767 fleet.

BA is not expected to take any decision on the Airbus super-jumbo until the aircraft is in commercial service from 2006.

He would not say whether BA's short haul European operation had achieved its target of break-even in the financial year just ending but maintained that "terrific progress'' had been made. When he joined the airline four years ago the short-haul business was losing more than £300m a year.

Mr Eddington said BA's short-haul business-class traffic had halved in the past three years under the onslaught from budget airlines and had now "gone for good''. BA expects a further decline in premium traffic on its short haul routes.