British Airways is on the road to recovery after one of the worst periods in its history but cutting costs remains the key to profitability.

Chief executive Rod Eddington told its annual meeting in London the airline met all the targets in its two-year restructuring programme, which was completed in March.

The Future Size And Shape project, launched in 2002, resulted in 13,000 job losses, including 3,000 at Gatwick.

In January British Airways (BA) said it was looking for a further £300 million of savings in staff costs, a move which union leaders claim would lead to a further 4,000 job cuts.

Most are expected to go at Heathrow but some staff at Gatwick, including baggage handlers and cabin crew, are likely to be affected.

Mr Eddington warned higher oil prices and security issues "continued to remind us of the volatile nature of our business".

He said: "Our year-end results for 2003-2004 suggest we are on the road to recovery.

"But the recent surge in oil prices demonstrates how swiftly and easily the brakes can be applied.

"Our focus on reducing costs therefore remains key to long term profitability."

BA announced profits for last year of £230 million, a 70 per cent increase on the £135 million recorded the previous year.

However, one shareholder accused the company of being "arrogantly complacent" in its approach to shareholder returns and said the board had left BA bloated with costs for too long.

Lord Marshall, who stepped down as BA chairman yesterday, replied the company continued to be concerned but its current share price was now 31 per cent up on the same period last year.

He said the airline had gone through some extremely difficult times since 2001, including the foot and mouth disease outbreak in the UK, the September 11 terrorist attacks, the wars in Afghanistan and Iraq and the Sars epidemic in Asia.

The airline was now faced with higher oil prices and strong competition from no-frills airlines.

Lord Marshall said: "All this is clearly well beyond the normal experience you would expect to have in running a business."

Mr Eddington said the airline recognised there was more to do to restore its fortunes.

He said there would be "blood on the carpet" as the fiercely competitive no-frills airline industry in Europe, which now consists of 54 airlines, consolidates over the next few years.

He said: "Clearly the headwinds remain strong."

Lord Marshall has been replaced as chairman by Martin Broughton.

Wednesday July 21, 2004