BA profits set to dive as costs go soaring

Such rising costs will mean the airline will have to give up on its long-coveted target of making profit margins of 10% - a key aim of chief executive Willie Walsh on which he has asked investors to judge him.

Last summer's boom is likely to see BA harvest revenues of more than £8.7 billion for the financial year to the end of the month. And with Walsh confident of achieving 10% margins for 2007-8, operating profits for the full year should top £870 million, a record performance by the airline.

But at BA's Investor Day for City analysts today, the airline warned that operating profits will be significantly lower in the next financial year as the airline is expecting to hit an operating margin of just 7%.

With revenues expected to come in next year at £9.1 billion, a margin of 7% will produce operating profits of around £635 million. That would represent a fall in operating profits of £235 million, or more than 25%.

"The outlook for next year is consistent with economic slowdown," BA's finance director Keith Williams told analysts.

"There is the impact of increased fuel costs and one-off Terminal 5 transition costs."

Fuel costs, BA warned, will leap by 20% next year, up £450 million to £2.5 billion, as fuel hedges contracted at substantially less than the prevailing $100 a barrel begin to unwind.

The rise in the kerosene bill will more than offset BA's expected rise in revenues next year - and that is before the likely cost of moving into T5 which will push upBA's non-fuel costs by £200 million in the year.

Fuel costs alone will outweigh the expected 4% to 4.5% rise in sales next year which will bring in extra revenues of around £350 million.

BA expects to fly 2.4% more seats next year and the faster growth in revenues is expected to come from the fuel surcharges slapped on passengers - now exceeding £100 on the longest international flights - and an improvement in its mix of passengers with more flying business or premium economy.

Latest figures from the airline show its premium traffic in February soared by 15%. BA says long-haul premium markets - its most profitable segment - remain strong.

But the picture is not so rosy elsewhere. Monthly numbers of passengers flying in economy are falling in real terms, with long-haul economy especially weak, indicating the effect of the economic downturn and dollar pain felt by Americans.

The airline has also warned that shorthaul premium traffic has been weak, indicating business travellers within the UK and Europe are down-trading.

BA shares fell 3p to 262p.