British Airways today gave warning that its fuel bill will top £2 billion for the first time this year but revealed that cost-cutting and a rush for business and first-class tickets had generated record half-year results.

Pre-tax profits in the six months to September 30 leapt 26 per cent to £593 million with the airline’s operating margin rising to 12.5 per cent - ahead of the 10 per cent target set for March 2008.

Willie Walsh, the chief executive, revealed that costs fell by £150 million in the period, following a drop in pension contributions and the renegotiation of a number of lease agreements on BA aircraft.

Passenger numbers dropped 0.4 per cent to 17.8 million but BA is continuing to pick more higher-margin, premium-rate traffic.

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Revenue fell 0.8 per cent to £4.5 billion and BA said the weak dollar meant revenue growth was now likely to be only 3 to 3.5 per cent this year, the second cut to the forecast in a year.

Shares fell 2 per cent or 11p to 419p.

However, Mr Walsh said: “These are record results which are driven by all the hard work our people put in last year to tackle the cost base of our business.

“Profits are up some 26 per cent and costs are down nearly 4 per cent. We see every possibility of achieving our 10 per cent operating margin by March 2008.”

Analysts had expected strong profits growth given BA’s £100 million bill a year ago following the security chaos at Heathrow Airport.

Mr Walsh said fuel costs “remained a major concern” given the spiralling crude oil price, which earlier this week hit a record $96.24 a barrel.

BA’s fuel bill is expected to top £2 billion for the financial year to March, up £100 million.

However, Mr Walsh said the weakening US dollar had insulated BA from the worst of the oil price rise. He added that the increase in the fuel bill was £20 million lower than originally had been feared.

BA said the benefits from the weak US dollar on the cost side were offsetting the losses on revenue. BA loses out when converting dollars received from US passengers back into sterling.

Net debt was £422 million higher at £1.4 billion following the £270 million price-fixing fine from US and UK competition authorities in July.

Keith Bowman, equity analyst at Hargreaves Lansdown, said the market consensus on the airline was likely to remain "cautiously positive".

He said: "The cut to sales growth estimates going forward is providing investors with some caution, on a day when wider market conditions are also precarious.

"That said, despite the many volatile factors which British Airways has to negotiate – fuel costs, currency movements and the fallout from geopolitical tensions – the group’s business model of applying a determination in removing costs whilst concentrating on ‘value-added premium’ services, continues to underwrite progress."

Deutsche Bank added: "We believe this is a good set of figures from a strong management team."

BA recently announced plans to order 36 new Airbus A380s and Boeing 787 longhaul aircraft in a bid to improve fuel efficiency by 25 per cent by 2025.

Mr Walsh added that thousands of volunteers had already taken part in trials at Heathrow’s new Terminal 5, which opens in 145 days. “Our people are determined to ensure it will be a national success story Britain can be proud of,” he said.

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