nal Airlines Group, formed by the merger of British Airways and Iberia, warned that ticket prices could rise again as political instability in the Middle East pushed up fuel prices. BA, which already raised its long-haul fares last month to reflect the rising cost of jet fuel, said fares could jump again. "We will adjust the surcharge if we believe that is necessary," IAG's chief executive Willie Walsh told reporters Friday. "Given the increasing volatility in the fuel price in the last few weeks, if that volatility continues I think it's likely that increases will be seen in the market." Oil rose more than $1 a barrel to top $112 Friday as the revolt in Libya sparked fears of supply shortages. Refineries in Europe import about 80 percent of Libya's 1.3 million barrels per day of exports, analysts say. IAG, which started operations on Jan. 24 and is hedged for 53 percent of its fuel requirements in 2011, said its pro-forma fuel costs rose 5.2 percent or 49 million euros in the final quarter of 2010. "We are monitoring the impact of the current Middle East instability on fuel prices and have the flexibility to change our capacity plans if necessary," said Walsh. "We are reasonably hedged for the short term (76 percent for the first quarter of 2011), but the price of oil will clearly be a challenge to the market in the short term." RBS analyst Andrew Lobbenberg, the top-rated analyst covering IAG, according to Thomson Reuters StarMine, said he was concerned by the group's "light" hedging policy but that it was unlikely to stop IAG meeting full-year profit expectations. "IAG's competitors are about 15 percentage points more hedged," he said. "Consensus for 2011 ranges between 650 and 750 million euros for earnings before interest and taxes, and we see this as achievable even at current spot prices." Reporting pro-forma results for 2010, IAG said it made a pretax profit last year of 84 million euros ($116 million), which compared with a loss of 1.15 billion euros in 2009, on revenues 10 percent higher at 14.79 billion euros. IAG shares, which have fallen 10 percent since Air France-KLM issued a profit warning last week, were 2.5 percent up at 231.8 pence by 1220 GMT, valuing the company at around 4.5 billion pounds ($7.3 billion). Walsh said the company's return to profit was based on growing revenues and yields and a small capacity increase. Underlying capacity is expected to grow slightly in 2011. The combined numbers assume that the two airlines had operated as a single entity for the last 12 months, while year-ago comparisons have been calculated by IAG. No useful consensus forecast was available, as the two companies only sealed their merger in November, and analysts' estimates varied widely. Profits in the final quarter of 2010 were affected by severe weather in the UK and a Spanish air traffic controllers' strike, the company said. The return to profit comes on the back of a recovery in premium travel, but analysts fear rising oil prices and weakening consumer confidence in Europe could trigger another slowdown. Rising oil prices could wipe out airline profitability in 2011 and hinder the industry's recovery, airline body IATA said earlier this month. "If economies globally remain broadly healthy, demand for air travel will remain broadly healthy and some of the increased fuel costs can be passed on," said Societe Generale analyst Jonathan Wober. "But if we have a significant weakening of the global economy, it becomes a lot more difficult, and depends on how high the oil price goes." Walsh said jet fuel had traded at around $970 per ton in recent days, and if prices remained around that level IAG's fuel costs for 2011 would be around 5.1 billion euros, up from 3.9 billion in 2010. Earlier this month Air France-KLM sent shivers through the aviation sector by issuing a profit warning triggered by snow, strikes and most recently African riots.
