BA looks good for the long haul

The airline is a volatile stock but it should offer plenty of mileage for loyal investors

BRITISH AIRWAYS is flying high as the City's favourite airline after last Monday's first-quarter figures caught industry- watchers on the hop. Ahead of the most optimistic expectations, BA's profits took off by 57 per cent to reach a record pounds 135m, sending many analysts scurrying to upgrade their full-year forecasts.

Passenger numbers soared 7.2 per cent to 8.3 million, while BA's passenger- load factor - the all-important indicator of aircraft occupancy - increased to a record 73.5 per cent. This is all good news for BA's 240,000 small shareholders, who have seen their shares rise from 125p at privatisation in 1987 to 443p on Friday. But is there more mileage in the shares?

The results were not quite as spectacular as they appeared: there were some one-offs in the first quarter. The 1995 figures included the busy Easter period, unlike 1994, which was also hit by the IRA mortar-bomb attack on Heathrow. The 1995 upturn also reflects the impact of BA's pounds 70m relaunch of its Club Europe business service, and the launch of World Offers, its discounted long-haul fares promotion.

BA's share appeal has been boosted by its managers' upbeat tone, combined with an encouraging picture for the airline industry worldwide. Last week, airport operator BAA announced record passenger figures for July, and in June IATA, the body that represents 230 carriers, predicted that 1995 could be the best ever year for growth.

"Looking ahead at the next three years," says Derek Stevens, BA's finance director, "we see the economies we serve in a good growth phase. Even with talk of an economic soft landing, the outlook is buoyant."

Mike Powell, aviation analyst at NatWest Markets, is similarly confident. "The first-quarter figures are very good. We see healthy passenger-traffic growth for BA, ahead of more modest growth in the industry, and we rate BA's management highly."

Not all analysts leapt to adjust their full-year forecasts, though. Recommendations from six brokers were equally divided between "buy" and "hold". The brokers agree that BA is a classic cyclical stock but differ on its place in the cycle.

On several fronts, BA is making all the right moves. Its commitment to cost-cutting is proven. It has taken out pounds 750m of costs over the past four years, and a further pounds 150m is set to be trimmed this year. It is also investing in new aircraft to meet rising demand, setting aside up to pounds 1bn annually. This autumn sees the delivery of quieter and more fuel- efficient Boeing 777s.

Brand image and marketing are further strong points. Following the successful relaunch of Club Europe, BA plans to overhaul its Club World service for long-haul business customers, as well as its first-class service.

BA has a strong hand worldwide. Not only does it have a prime position at the world's busiest airport, Heathrow: its links with groups such as Qantas of Australia, where it has a 25 per cent stake, are helping to secure more international business and delivering healthy benefits in the form of shared costs and promotional initiatives.

With deregulation in Europe opening up the skies in 1997, BA needs to expand its market share, and further alliances with national carriers are likely.

BA's clear strategic vision is not, however, without its clouds. The outlook at the loss-making USAir, where BA has a 25 per cent stake, looks a bit brighter as stronger trading and cost cutting make themselves felt. But there is still the possibility of a wage dispute with USAir's unions.

In Europe, first-quarter losses at Deutsche BA and French airline TAT have been "substantially reduced", according to BA, which owns 49 per cent of each. Last year, the losses were pounds 90m.

The German carrier is making inroads into Lufthansa's market share, although TAT is finding the competition tougher to crack. Mr Stevens says: "It will be a couple of years before we see profits in the two groups."

The BA bears point to the fiercely competitive nature of the airline business, where discounted fares are the order of the day. In the first quarter, passenger yields (profit margin per customer) fell 2.4 per cent, reflecting the impact of discounts on long-haul flights.

But while BA acknowledges that yields will remain under pressure, in the longer term the lower unit costs of far-flung routes will begin to feed in.

BA may have to work hard to sustain its first-quarter growth but is well placed to benefit from the predicted growth in the industry over the next decade.

It is already the world's second most profitable carrier, and as deregulation opens up new routes, low-cost operators such as BA stand to gain most.

The shares are on a comfortable p/e multiple of 11.4 and, with profits set to reach pounds 580m in 1995/6, look good value.

BA is a volatile stock. It can be hit by anything from hijacks to rises in the oil price. Shareholders averse to turbulence may find now a good time to bail out and take profits. But loyalty should be rewarded in the long term.

British Airways

Share price 443p Prospective yield 3.9% Prospective price-earnings ratio 10.9 Dividend cover 3 1993 1994 1995

Sales pounds 5.56bn pounds 6.30bn pounds 7.17bn Pre-tax profits pounds 185m pounds 301m pounds 327m Earnings per share 21.4p 32.5p 26.2p Dividend per share 10.2p 11.1p 12.4p