British Airways warns of full-year operating loss

British Airways warned a weak economy and the pound's decline would see it fall into the red in 2008-09, sending its shares down 8.5 per cent yesterday. The British carrier said it would make an operating loss of £150 million in the year to end-March, compared to a guidance repeated earlier this month for a small operating profit.

The carrier, in merger talks with Spain's Iberia, forecast a third-quarter operating loss of £50 million.

"Further economic weakness in January and the outlook for February and March combined with the fall in sterling, are impacting our outlook for the year," BA said in a statement.

The airline said its revenue guidance for the full year remained unchanged but it now expected non-fuel costs to rise eight per cent this year versus previous guidance for a five per cent increase as foreign exchange rates take their toll.

BA shares ended 133.8 pence, a nine-week closing low and versus a 3.9 per cent rise in the FTSE 100 index.Rival Air France-KLM issued a profit warning last week, but low-cost EasyJet saw its shares rally last Thursday after saying it would manage to stay in the black.

Societe Generale analyst Jonathan Wober said the BA warning was on profit whereas Air France had suffered on revenues.

"I was expecting a (BA) warning on revenues at some point, but this is on costs - I wasn't expecting that. The question mark over the industry is the level of demand, and that's the revenue side of the equation," he said. BA highlighted the impact on costs of the fall in sterling, which hit a 23 year low against the dollar on Friday and has been trading near all time lows against the euro.

A BA spokesman said the carrier's talks with Iberia were still on-going despite the profit warning, but BA's latest share price fall has further skewed valuations of the two carriers.

At the time the talks were announced last July analysts had been expecting BA to make up around two-thirds of the combined entity, but the share performance of the pair since then has seen Iberia become larger in terms of market capitalisation.

"British Airways value is now below that of Iberia, making a deal much harder to agree and then sell to its shareholders," Mr Wober said. BA chief executive Willie Walsh told reporters in India over the weekend that Iberia's share price was overvalued and BA shareholders were unlikely to agree a merger based on current market values.