Cazenove asks $50 question of BA

British Airways came within a whisker of closing at a 52-week low yesterday after blue chip broker Cazenove slashed its earnings forecasts for the airline and warned that only no-frills operator Ryanair could be profitable if Brent crude stays above $50 a barrel for a year.

With Brent trading close to that level, Cazenove analyst Edward Stanford believes there is a realistic possibility that fuel prices next year will be considerably higher than he, or the City, expected.

He has cut his 2005 BA earnings forecast by 13% to 13.5p a share and that for 2006 by 24% to 18.4p. This, he says, leaves BA looking expensive compared with many rivals.

Mr Stanford also says the rising oil price could also affect demand for air travel.

"We believe that the impact of high oil prices on GDP, the ultimate driver of demand for air travel, is much more significant threat to the airline industry and could again forestall any hopes of a sustainable recovery in earnings," he said.

With Mr Stanford repeating his underperform rating on BA, its shares closed 5.5p lower at 200.5p, the biggest faller in a dull FTSE 100.

In the wider market, leading shares marked the 17th anniversary of Black Monday by closing higher for the first time in six sessions. Lifted by BP, up 2.2p to 546p, and gains for BOC Group, which rose 13p to 883p on renewed hopes of a merger with German rival Linde, the FTSE 100 finished 3.9 points higher at 4626.6.

The FTSE 250 closed 20.9 points lower at 6259.9, dragged down by grocer Somerfield, which dropped 4.75p to 129.25p on reports it is considering spending £250m on buying 120 Safeway stores from their new owner, Wm Morrison, off 0.75p at 192.2.5p. The FTSE Small Cap index eased 1.3 points to end at 2581.3.

In the bond market, gilts fell to a seven-month low after the Royal Institution of Chartered Surveyors reported a sharp slowdown in house prices. With traders betting that interest rates have peaked, the benchmark 10-year gilt closed at 102.180, yielding 4,721%.

Back among the blue chips, mobile phone operator mmO2 was the star of the session. Its shares rose 1.5p to 101.5p after US investment bank Morgan Stanley said it was worth holding on to the shares despite their recent strong run. They have gained nearly 13% since the start of September.

"Management are due to announce their plans for shareholder remuneration in November and we see the scope for a buyback of up to £1bn over the next 18 months," analyst Damon Guirdham said.

Morgan Stanley was also responsible for the interest in HBOS. However, its shares went in the other direction, closing 11.5p lower at 748.5p after the bank downgraded to equal-weight from over-weight, citing concerns about increasing competition. Analyst Robin Down believes UK mortgage banks have reacted to the slowdown in the housing market by cutting prices.

On the FTSE 250, rumoured takeover target Singer & Friedlander eased 10p to 301p as Bridgewell Securities again urged clients to switch into South African bank Investec, down 8p to £10.77. Bridgewell believes Moody's decision to consider upgrading South Africa's credit rating should underpin the rand at current levels. All of which bodes well for Investec, which draws about half of its earnings from South Africa.

Among the small caps, Countryside Properties, the housebuilder in takeover talks with a management buyout team led by chairman Alan Cherry, was again a talking point. Its shares improved 4p to 273p after the mysterious Rock Pacific Ltd declared the purchase of a further 1.25m shares, taking its holding in the company to 8m shares, or 10.1%.

Countryside has been firing off section 212 notices to try to find out who controls Rock. All the company has been able to establish is that Rock is based in the Bahamas. Indeed, sources close to the company admit that they do not know whether Rock is a bid arbitrage fund or the investment vehicle of a counter-bidder.

Market professionals reckon Rock Pacific is a subsidiary of a North London company called Rock Securities, which is rumoured to have close links to Heron International, the property company controlled by Gerald Ronson. Heron owns a 20% stake in another housebuilder, Crest Nicholson, steady at 348p yesterday.

They also note that Rock also has an interest in 11.58m Countryside shares - 14.6% of the company - through a derivative product known as a contracts for difference (CFD). This could be significant because many CFDs carry an option that allows the owner to purchase the underlying stock.

If Rock has this right and exercises it, the mysterious company could end up with 25% of Countryside and make life very difficult for Mr Cherry and his buyout team.

Elsewhere, Cape, the building materials group, held firm at 131.5p despite news that the highly rated Dynamic Fund at Merrill Lynch Investment Managers had increased its holding to 4.15%.

Premier Direct, the workplace seller of cheap and cheerful novelty gifts and books, eased 1.5p to 715p despite talk that today's full-year figures will impress, with the company likely to post earnings in excess of 72p a share. Gossips reckon turnover is rapidly approaching £1m a week and the company's Christmas range is very strong.

Bioprogress, the tablet coatings maker which will list on Nasdaq soon, eased 0.25p to 125p after chief executive Graham Hind announced the sale of 300,000 shares, while Melrose Resources gained 15p 261.5p as traders said the stock looked cheap. Servicepower, the developer of scheduling software, fell 3.75p to 28.25p as a large line of stock was hawked around the market.

Race is on to fill FTSE slot

The race to secure a place in the FTSE 100 got under way yesterday and City traders believe it will go down to the wire.

Index compiler FTSE confirmed yesterday that Abbey National will be removed from the index on Monday November 15 after the completion of its £9bn takeover by Spain's biggest bank, Banco Santander. FTSE said Abbey's place would be taken by the biggest company on the six-strong official reserve list.

At the moment that is International Power (market capitalisation £2.24bn). However, that could change over the next month.

In close pursuit of IP are Corus, the Anglo-Dutch steel group (£2.19bn), plasterboard maker BPB (£2.18bn) and water company Kelda Group (£2.03bn).

Of the chasing pack, City traders reckon Corus could easily overtake IP and reclaim the FTSE 100 position it lost almost two years ago.

IP shares eased 0.25p to 152.25p, while Corus fell 0.5p to 49p, BPB lost 2.25p to 424.25p, and Kelda rose 1p to 543p.