S&P announced that it would be cutting BA's credit rating following an assessment of the impact of the war in Iraq and the Sars virus.

"As a result of the more challenging industry environment, S&P believes that British Airways' financial profile and credit measures are no longer, nor are likely to be, over the next several years, appropriate for an investment-grade rating," said S&P analyst Bob Ukiah.

But BA said it was "astonished" at the decision, saying that its cost-cutting programme was proceeding as planned and that business prospects were looking up.

Shares in BA were down nearly 5% in mid-afternoon trade at 144p.

Anger

S&P said it was downgrading BA's long-term corporate credit rating from 'BBB-' to 'BB+' and its unsecured senior debt from 'BB+' to 'BB-'.

I am astonished that Standard & Poor's has chosen to downgrade us at this time John Rishton, BA

It said the ratings reflected BA's high debts, additional future pension contributions, ongoing competition in key markets and an above-average exposure to the fiercely competitive North Atlantic market.

It said these weaknesses were only partly offset by BA's cost-cutting progress and its strong position at Heathrow.

But BA has reacted angrily to the move.

"I am astonished that Standard & Poor's has chosen to downgrade us at this time," said chief financial officer John Rishton.

"Since the last Standard & Poor's review we have exceeded all of our financial and restructuring targets under our Future Size and Shape programme and only last week Moody's confirmed its rating for the company and its debt.

"The war is over, Sars is fading, the US economy is showing signs of recovery and traffic volumes are improving from the worst levels."

Cost cuts

BA has been restructuring its business for some time now in a reaction to the post-September 11 downturn in air travel and fierce competition from budget carriers.

Since August 2001 it has shed more than 10,000 posts and says it is on track to achieve its target of 13,000.

It added that its debt is down �1.4bn from its peak and the restructuring programme has made annualised cost savings of �570m against a target of �450m.

The impact of its cost-cutting programme was shown when it reported a profit of �135m on the year to 31 March, compared with a �200m loss the previous year.

However, the impact of the build-up to the war in Iraq contributed to a �200m loss during the January to March period.