Jeremy Warner: British Airways reports big rise in yields

Outlook: A profit of any kind counts as good news in the airline industry these days, so guidance from British Airways yesterday that it is set to make a small operating profit for this financial year caused its shares to soar. All things are relative, however. Since their peak last year, the shares are down by 75 per cent. Against the scale of the fall so far, yesterday's bounce barely registers.

Still, there were a number of positives to be taken from the interim statement, despite the fact that the reported profit is achieved only thanks to a change in depreciation policy. One is that BA's decision to fight the downturn and the high oil price with higher fares actually seems to be working. Yields were up 10.5 per cent and, despite a worrying fall-off in premium traffic in recent months, BA is confident enough of its position to be able to raise its revenue guidance for the full year to 4 per cent.

These are highly uncertain times, and Willie Walsh, the chief executive, may have made himself a hostage to fortune by making such a bold forecast. The world economy is getting worse by the day. It seems certain that this deterioration will eventually affect business-class travel much more seriously than it has to date. Against that, BA seems now to be getting a real boost from Terminal 5 at Heathrow, which has added to its attractions as a destination and transfer carrier.

BA is fighting the recession by raising prices, the low-cost carriers by cutting them. Both strategies appear equally valid for the particular markets these airlines serve. BA's premium positioning ought to make its customers less price-conscious. We'll see. In any case, Mr Walsh needs the present top-line resilience to hold good if he is to get the merger with Iberia through on anything like the terms originally agreed. Since then, the two share prices have moved seriously against each other.

The collapse in the stock market has also caused BA's already mountainous pensions deficit to grow even further. BA insists that, following extensive probing, the Spanish are now relatively relaxed about the pensions liabilities, but that won't make the terms as originally outlined any more palatable to them. Consummation of the merger on terms acceptable to both sides remains touch and go.