Airlines: BA cuts winter flights and raises fares as surging oil price sends profit into tailspin

British Airways will raise fares and cut flights this winter after reporting an 88% slump in profits yesterday amid what it called the "worst ever" trading conditions in the airline industry.

BA is dropping six short-haul routes and cutting profitable London to New York services as the oil price rise and credit crunch take their toll.

It will be flying fewer seats between October and March, cutting winter capacity by 3%. BA's Gatwick hub is the most affected, with services to Newquay, Dresden, Sarajevo and Poznan dropped altogether.

A near-50% increase in fuel costs hammered the airline's first-quarter results yesterday, with pre-tax profits slumping from £298m to £37m in the three months to June 30.

Chief executive Willie Walsh, who confirmed merger talks with Spanish airline Iberia this week as the industry seeks safety in consolidation, said airlines were in uncharted territory. "We are in the worst trading environment the industry has ever faced. The combination of unprecedented oil prices, economic slowdown and weaker consumer confidence has led to substantially lower first-quarter profits."

Carriers that struggled to make a profit during the recent sales boom would not survive a downturn that has put 25 airlines out of business this year, including Luton-based business carrier Silverjet. "You are going to see more airlines go bust. If you look around there are a lot of airlines out there that have not been profitable in the past few years. Those guys will not survive." Rivals will have to raise fares to accommodate fuel costs that have hit £8m a day at BA.

"Airlines are going to have to reflect the higher oil price. We will have to do something, and it's not just BA that will have to adjust prices - the whole industry will have to," he said. Walsh added BA fares will rise by an average of about 3% for the rest of the financial year.

Fares are expected to increase towards the end of the year as fuel hedges - whereby carriers buy their fuel in advance at a fixed cost that is often cheaper than the current market price - come to a close. The weakening UK and US economies are also hitting demand for flights, with BA's load factor - which gives a snapshot of how many seats are sold per flight - falling 3.4% to 73.4%. Walsh did not rule out capacity cuts next summer, saying BA will fly its older long-haul planes less often next year. "We are not talking about grounding aircraft but the average utilisation will come down slightly."

He was "comfortable" with axing about 160 flights a week from BA's winter schedule because sales are always slower between October and March.

Plans to start new services between Gatwick and Oporto and Valencia have been scrapped.

Cuts to Heathrow services, including one less flight a day to New York, brought a warning that the case for a third runway at Britain's largest airport will be severely undermined if the airline continues to cut services.

"It looks a bit odd to be shrinking on the one hand and calling for a third runway on the other," said Douglas McNeill, analyst at Blue Oar Securities.

Walsh denied that the case for a third runway had been hit by capacity cuts at BA and other airlines, pointing to strong long-term demand for commercial flights.

BA expects to seek anti-trust immunity under US competition law for an agreement with American Airlines on fares and route planning over the next fortnight, as it continues merger talks with Iberia.