British Airways' first quarterly loss in four years has triggered doubts over its grip on premium business markets and analysts expect further losses before things improve.

Intense competition, particularly across the Atlantic, finally pushed the group into the red, resulting in a £75 million ($122 million) loss before tax in the three months to December. The result was affected by one-off charges but analysts concur with BA's suggestion that further poor results are to follow.

Analyst Martin Borghetto, at Morgan Stanley in London, projects a pre-tax loss of £87 million for the next quarter, but remains optimistic. "In the short-term there will be further pressure on yields," he says, buts adds:"...BA is at the latter end of the downwards spiral."

To regain its feet, BA plans to cut back capacity growth to 2% a year for the next three years, after double digit expansion last year. This will not hurt the premium cabin, but will see a fall in the proportion of economy class capacity on offer due to the front-heavy seat arrangement of the Boeing 777 fleet, which will begin replacing BA's 747 "classics" this summer. BA wants to reduce its exposure to the fiercely competitive market for transfer traffic, by shifting economy customers in particular onto point-to-point routes.

Borghetto endorses this strategy. "BA doesn't need low yield transfer traffic out of continental Europe. They are focusing on what they are good at," he says.

James Halstead, analyst at Banque Indosuez, says that while BA has "perceived " product quality, competitors like Lufthansa have considerably closed the gap. "If BA goes for high yield traffic it has got to make sure that its product is so far above the rest that it really is the carrier of choice," he says.

Halstead accepts that, with restricted capacity for growth in London Heathrow but a large catchment area, there is a strong logic in BA's emphasis on premium and origin and destination traffic. But this strategy does have its weaknesses, he adds. "The advantage of discount traffic is that it is a yield filler. If BA actively blocks off transfer traffic ... yields are not going to be optimised. It also makes your business more cyclical."

As if to confirm its troubles, BA is to abolish its Performance Reward Scheme because travel agents have failed to meet targets. This comes on top of its 1997 reduction of commission rates from 9% to 7% on international services and by half a point to 7% on domestic flights.

Source: Airline Business