Market Report: BA investors disembark as cost pressures rise

Investors might have to wait for world peace before seeing a dramatic improvement in the share price of British Airways. This was the darkly flippant conclusion of a review of the airlines sector by one of its leading analysts yesterday, and it sent BA shares nosediving.

Investors might have to wait for world peace before seeing a dramatic improvement in the share price of British Airways. This was the darkly flippant conclusion of a review of the airlines sector by one of its leading analysts yesterday, and it sent BA shares nosediving.

Andrew Lobbenberg of ABN Amro, in a doorstopper of an investment note, abandoned his "buy" recommendation on the UK's flag carrier, and slashed his forecast of BA's earnings this year by 15 per cent.

The main reason for the cuts was a £100m increase in the annual fuel bill which, with the oil price ticking higher yet again yesterday on fears of disruption in the Middle East, prompted Mr Lobbenberg to muse about world peace. But there were a string of other reasons for ABN Amro's decision to switch on the "fasten seatbelts" sign.

The recent brinkmanship of baggage handlers' unions has raised the temperature in labour relations and is likely to make BA's vital cost-cutting programme harder to implement. Virgin Atlantic has introduced better beds to lure sleepy business travellers. BA's Oneworld alliance looks to have fallen behind its rivals and is showing signs of stress, with a growing rivalry between the putative partners BA and Qantas. And a US-European Union deal on industry liberalisation is likely to be bad for BA, too.

With such a gloomy forecast from Mr Lobbenberg, few investors wanted to fly BA, and its shares dived 7.5p to 254p.

It was the worst performer in the FTSE 100, which broker its seven-session losing streak with a 22.7 point rise to 4,381.1. A recovery by the banks, attributed by some to relief at the (admittedly widely expected) decision to hold the base rate, accounted for the reversal. HBOS, up 11p to 680p, and Royal Bank of Scotland, 24p north at 1,563p, were the pick of the pack.

There was widespread concern, however, over the outlook for the advertising industry. ITV shares were among the worst FTSE 100 performers, off 2p at 108.75p in heavy trading, amid indications ad revenues in September could be little better than the same month last year. WPP, the giant advertising agency, fell 10.5p to 524p yesterday, and Aegis, a smaller player, fell 1.25p to 83.75p. The advertising-dependent commercial radio companies mostly fell, too. Capital Radio was 7.25p lower at 424.75p despite a charm offensive among US investors, while Chrysalis dipped 7.75p to 185.25p. Emap, which owns Kiss FM but also has struggling magazine interests, tumbled 4.5p to 718.5p after a disappointing trading update. Only The Wireless Group, owner of TalkSport, scored a rise, up 3.5p to 92.5p after detailing an 87 per cent uplift in revenues for its flagship station during Euro 2004.

Speculation persisted of a profit warning at GlaxoSmithKline, the UK's leading drugs maker, which has already warned investors to expect only flat earnings this year. However, there was a late surge of buying of pharmaceuticals stocks and GSK ended up 8p at 1,091p, with AstraZeneca shaking off worries over poor sales of its cholesterol drug Crestor to close 28p healthier at 2,415p.

Ian Gowrie-Smith, founder and chairman of SkyePharma, sold £1.2m of shares in his drug development company, cutting his holding from 8.5 million to 6.5 million shares. SkyePharma was up 0.25p to 62p after refinancing the majority of debts due next year, and completing trials of a new asthma treatment. Mr Gowrie-Smith's other medical company, Micap, which floated at 55p a year ago, was up 2.5p to 46p on news it has started trials of a pill against the hospital superbug, MRSA.

The closing auction threw up an extraordinary result in Celltech, the biotech group which is being taken over by Belgium's UCB for 550p-a-share. A million shares were bought at 565p, the rumour being that a short seller of the stock - who sold shares borrowed from someone else in the mistaken hope they would fall in value - was having to return borrowed stock. At 656p, Celltech showed a 16.5p gain on the day.

Colt Telecom plunged more than 8 per cent, by 3.75p to an all-time low of 41p, in very heavy volume, with rumours that a big institutional shareholder was giving up on the group after its savage profit warning last week.

There was further big selling of Courts, too, as a round of meetings after its warning last month failed to satisfy investors, who now fear a very bad deal indeed from refinancing talks with the company's banks. The stock was 34.5p lower at 107p, its lowest level for 13 years.

But there was relief of sorts for Jarvis shareholders, as the rail maintenance and construction group jumped 3.25p to 28.25p amid speculation that Ferrovial, the Spanish construction group which bought Amey last year, might make a bid for stricken Jarvis or its private finance initiative assets.

There was chatter that, a data storage hardware company, is set to announce an extended relationship with Hewlett Packard. The shares were steady at 206.5p.

MARKET MOVERS

Abbey National 500p (up 18.5p, 3.8 per cent). Bid talk returns. Citigroup and Santander touted as buyers.

Man Group 1,496p (up 31p, 2.1 per cent). Trading update this week proved it is still attracting new investment.

Ten Alps Communications 50p (up 4p, 8.7 per cent). Teachers' TV okayed.

Leisureplay 13.5p (up 0.88p, 6.9 per cent). More investor backing for Terry Ramsden and his plans for the shell.

Debt Free Direct 85.5p (up 2.5p, 3.0 per cent). Maiden profit.

Belhaven 478.5p (up 2p, 0.4 per cent). Trading 14 per cent above internal targets, gossips say, thanks to recent good weather.

QXL Ricardo 448.5p (up 38.5p, 9.4 per cent). Strong trading rumoured.

Smith & Nephew 614p (up 25p, 4.2 per cent). US investor buying after transatlantic charm offensive, with takeover talk adding further to gains.

Stanley Gibbons 85p (up 6.5p, 8.3 per cent). Promises to return cash.

Geest 537p (up 22p, 4.3 per cent). Smith Barney says "buy" on hopes that the readymeals company's new 20 per cent shareholder, Bakkavor, will eventually table a full takeover bid.

VT Group 268.75p (up 6.5p, 2.5 per cent). Wins £100m contract to manage the New Zealand navy's main dockyard.

Energy Techniques 7.25p (up 1p, 16.0 per cent). First product sale.

London & Boston Investments 10.5p (up 1p, 10.5 per cent). Has 9 per cent stake in Energy Techniques.

Regus 66p (up 6.75p, 11.4 per cent). Awaiting Global Workspaces acquisition.

Earthport 2.37p (up 0.15p, 6.8 per cent). Says it is claiming more than £13.5m in damages from Baltimore Technologies in contract dispute.

Baltimore Technologies 36p (down 4.75p, 11.7 per cent. Earthport's damages claim is more than cash reserves.

ICI 215.75p (down 5.25p, 2.4 per cent). Oil price drives up raw materials costs.

West 175 Media 0.87p (down 0.63p, 42.0 per cent). Returns from suspension after financial restructuring.

Durlacher 107.5p (down 9p, 7.7 per cent). Worries it has lost market share as broking activity has rebounded.