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British Airways Posts 28% Jump in First-Quarter Profit

British Airways beat forecasts with a 28% rise in quarterly operating profit on Friday but warned that a weak dollar and soaring fuel prices would slow full-year revenue growth and raise costs.

Earnings before interest and taxes of 263 million pounds ($534 million) for the three months to end-June beat all forecasts ranging from 206 million to 237 million pounds in a Reuters Estimates poll of four analysts.

Europe's third-largest airline cited lower severance charges and pensions costs as well as a more favorable tax rate to explain the year-on-year gain.

BA shares were up 3.3% at 417 pence at 0906 GMT, making it the biggest gainer on a London FTSE 100 index, which was down 0.23%.

"Higher fuel costs and a weaker dollar will not help matters in the short term, but BA has made significant strides over the last 18 months," said Richard J. Hunter, head of U.K. equities at Hargreaves Lansdown Stockbrokers.

"With the latest batch of negatives now out of the way and having seen a 24% dip in the share price over the last six months, the general market view is cautiously tending towards the positive."

Iberia Due Diligence

Chief Executive Willie Walsh told reporters on a conference call that BA, as part of a consortium that includes U.S. private equity firm TPG, was working on due diligence on Spanish airline Iberia.

"That will go on for some weeks," he said. Asked if Iberia's weaker-than-expected earnings reported on Thursday might affect the assessment, Walsh said it was too early in the process to make such judgments.

BA's own operating margin rose to 12% from 9.2% in the same period a year earlier. It reiterated a target of 10% for the full year.

"Profits are up as a result of the steps we took last year to control costs and strengthen our business," said Walsh.

Profit before tax rose to 289 million pounds from 191 million. Revenue fell by 2.4% to 2.19 billion pounds.

"Revenue is flat before exchange and reflects the continued impact of security and baggage restrictions on short-haul and premium transfer traffic, which Heathrow has been struggling to cope with," Walsh said, referring to London's biggest airport.

The airport, owned by Spain's Ferrovial, has struggled with overcrowding and system failures, which have hampered operations, Walsh said.

He noted that a 1.5 km (0.9 mile) tunnel used to carry baggage between terminals had failed nine times in June alone, forcing BA to contend with sorting thousands of stranded bags.

BA softened its revenue growth guidance by 1% point to around 4%, citing the continued weakness of the U.S. dollar.

It also said rising fuel costs would take a bite, rising by 120 million pounds this year, 20 million worse than earlier forecast.

"Whilst forecasts will be revised downwards, the reductions look to be relatively modest," Collins Stewart analyst Andrew Fitchie said in a research note.

He said BA's latest guidance for the year suggested a 100 million pound cut to operating profit forecasts but that a lowered tax rate and more beneficial finance income could moderate the impact.

BA set aside a 350 million pound provision in May for fines stemming from price fixing on fuel surcharges, and this week U.S. and U.K. authorities unveiled fines worth almost 270 million pounds.

"That was a best estimate and that remains the case," Walsh told reporters when asked if the provision would suffice for possible further fines as authorities in Europe, Canada, Australia, South Africa and New Zealand pursue separate probes.

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