KLM profit warning and war worries shake nervous airline sector

Airline stocks took a battering yesterday after the Dutch flag-carrier KLM warned that it was unlikely to make an operating profit in the current year as previously expected.

The markets were also unsettled by a warning from British Airways' chief executive Rod Eddington that investors should expect fresh turbulence in the already troubled airline industry if conflict breaks out in the Gulf.

BA shares initially fell 3 per cent following the KLM warning but they later recovered to close virtually unchanged on the day at 144.25p. However, KLM, Air France and Lufthansa all fell sharply and shares in the two no-frills airlines easyJet and Ryanair also ended lower.

KLM said that the trading environment would remain difficult in its final quarter, which ends in March, and cautioned that it was unlikely to make an operating profit for the year as a whole even excluding a €250m penalty it must pay for ending its tie-up with Alitalia. KLM shares dropped 8 per cent.

BA meanwhile reported a 2.8 per cent increase in traffic in December 2002 compared with a year earlier. The airline also warned that trading conditions remained challenging and repeated its forecast that revenues for the financial year ending in April would be down on the previous 12 months. However, BA's head of investor relations said the airline still expected to make a "modest" profit for the year.

Overall load factors on BA improved by 2 points to 66.6 per cent in the month while passenger capacity was down by 0.9 per cent. Passenger load factor – the number of seats filled on each flight – rose by 2.5 points on December, 2001, to reach 71.2 per cent.

Speaking in his capacity as the new chairman of the Association of European Airlines, Mr Eddington underlined the threat to airlines posed by a war in Iraq. "Our commercial problems in the aftermath of 11 September, 2001 were compounded by a host of political complications. Now, on the brink of another possible conflict, we have to be fully prepared for the consequences," he said.