Jeremy Warner's Outlook: Walsh pins hopes for sustainable dividend on the weakness of BA's competitors

Record profits, the first dividend in seven years, and the targeted 10 per cent operating margin achieved for the first time ever – anyone would think there were grounds for celebration at British Airways.

Instead, Willie Walsh, the chief executive, is forgoing his bonus in apparent contrition over the fiasco of Terminal 5, pilots are threatening to strike, and, with fuel costs soaring, the company is facing one of its most challenging years. Yes, indeed. In the airline industry, success seems to be counted only in minutes before trouble takes hold again.

Forget Terminal 5 and industrial action, the real problem going forward is fuel costs. These are running at around double the level of a year ago. Despite forward hedging, fuel will add another £1bn to costs this year if prices remain at present levels, enough to more than wipe out the record profits just announced.

Higher fuel bills can in part be defrayed through cost-cutting elsewhere in the business, but, having already cut costs to the bone over the last three years, Mr Walsh may be close to the limits of what's possible without so trouncing standards of service that the customer deserts him altogether.

As Mr Walsh concedes, more fuel surcharges are therefore inevitable. Long-haul non-premium and short-haul premium are already showing some fall-off. Might not higher prices prove counter-productive by pricing passengers out of the sky? Perhaps, but Mr Walsh may be right in thinking that the coming shake-out in the airline industry will leave stronger players such as British Airways with much-enhanced market share. Already a number of low-cost airlines and all business-class transatlantic players have gone to the wall.

It used to be harder to kill off an airline than Japanese knotweed. One way or another, they would always come bouncing back, either because national governments would bail them out, or in the US because they were able to seek protection from bankruptcy through Chapter 11. Both these life-savers may be more difficult this time around, despite the recent spectacle of yet more state aid for the failing Alitalia.

In any case, financially strong airlines are plainly better placed to weather the storm than those entering the downturn in an already weakened position. BA has been quite modest in its growth ambitions in recent years, which again should stand it in better stead as newer routes targeted by less cautious airlines struggle to survive. For the time being, BA plans no capacity cuts, while the declaration of a dividend underlines the board's confidence in the company's cash generative abilities going forward.

Even so, the share price says it all. In the past year, it has more than halved. BA's profits are again heading into a painful cyclical tailspin, with no certain way of knowing where they might bottom out. The debacle of Terminal 5 hardly gives confidence in the idea that BA is better prepared this time around than in previous downturns. Shareholders have little option but to buckle up and hope for the best. Whatever the final destination, it's going to be a bumpy ride.