BA/Iberia Warn Fares May Rise On Mideast Crisis

February 25, 2011

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International Airlines Group, formed by the merger of British Airways and Iberia, warns that the political instability in the Middle East could hit fuel prices this year, sending ticket prices higher.

BA, which last month raised its long-haul fares to reflect the rising cost of jet fuel, said ticket prices could jump again.

"We will adjust the surcharge if we believe that is necessary," IAG's chief executive Willie Walsh told reporters on Friday. "Given the increasing volatility in the fuel price in the last few weeks, if that volatility continues I think it's likely that increases will be seen in the market."

Oil rose more than USD$1 a barrel to top USD$112 on Friday as the revolt in Libya sparked fears of supply shortages. Refineries in Europe import about 80 percent of Libya's 1.3 million barrels per day of exports.

IAG, which started operations on January 24 and is hedged for 53 percent of its fuel requirements in 2011, said its pro-forma fuel costs rose 5.2 percent or EUR€49 million in the final quarter of 2010.

"We are monitoring the impact of the current Middle East instability on fuel prices and have the flexibility to change our capacity plans if necessary," said Walsh.

"We are reasonably hedged for the short term (76 percent for the first quarter of 2011) but the price of oil will clearly be a challenge to the market in the short term."

INITIAL RESULTS

Reporting pro forma results for 2010, IAG said it made a pretax profit last year of EUR€84 million, which compared with a loss of EUR€1.15 billion in 2009, on revenues 10 percent higher at EUR€14.79 billion.

Prior to trading on the London Stock Exchange being suspended due a technical problem on Friday, IAG shares were 1.7 percent higher at 230 pence, valuing the company at around USD$7.1 billion.

Walsh said the company's return to profit was based on growing revenues and yields and a small capacity increase.

Underlying capacity is expected to grow slightly in 2011.

The combined numbers assume that the two airlines had operated as a single entity for the last 12 months, while year-ago comparisons have been calculated by IAG.

Profits in the final quarter of 2010 were affected by severe weather in the UK and a Spanish air traffic controllers' strike which disrupted the airlines' operations, the company said.

OIL PRICE WORRIES

The return to profit comes on the back of a recovery in premium travel, but analysts fear rising oil prices and weakening consumer confidence in Europe could trigger another slowdown.

Rising oil prices could wipe out airline profitability in 2011 and hinder the industry's recovery, airline body IATA said earlier this month.

"If economies globally remain broadly healthy demand for air travel will remain broadly healthy and some of the increased fuel costs can be passed on," said Societe Generale analyst Jonathan Wober.

"But if we have a significant weakening of the global economy it becomes a lot more difficult, and depends on how high the oil price goes."

(Reuters)