LONDON -- Following four years of turbulence under the acid reign of former Chief Executive Bob Ayling,

British Airways'

(BAB) - Get Report

shares may finally be ready to start gaining some altitude.

Ironically for Ayling, who was axed in March, any early improvement in the stock price would owe much to the strategies he put in place. Yet, rather than take credit for plans that are expected to pay dividends (such as reducing aircraft size to concentrate on higher-yielding passengers), Ayling's legacy is likely to be one of costly labor-relations disputes, which will contribute to British Airways' first pretax loss since the company was privatized 13 years ago.

With labor relations one of the biggest quagmires for airlines, geniality is what British Airways needs. Enter Rod Eddington, who reported for his first day of work as British Airways' new CEO on Tuesday.

Although one of Eddington's first tasks will be to deliver financial results that could include a pretax loss of as much as 15 pence per share (23 cents) for the fiscal year ended March 31, compared with a profit of 15 pence per share last year, there should be some silver linings in those storm clouds.

Good news can't come soon enough for British Airways' shareholders, who've watched the stock lose half its value in the past year, as the broader market surged ahead. On Wednesday, shares traded at around 330 pence, near their 52-week low. Shares traded in New York were off 13/16, or 1.5%, to 52 1/8 as of 1 p.m. EDT.

The shares are currently trading at a discount to book value, notes Scott Clemons, manager of

Brown Brothers Harriman's 59 Wall Street European Equity

fund, who has been buying the company because he likes British Airways' strategy.

Because one-third of the seats are empty on an average British Airways' flight, the airline has been focusing on reducing its seat capacity by 12%, according to a company spokesman. The process will continue over the next three years.

"We're de-emphasizing the lowest-yielding, least profitable end of travel," the spokesman says, referring to short-haul transfer travelers. "We can't make money from serving these people."

For instance, the rise in premium traffic, which surged for a ninth consecutive month in March by 8.5%, is pushing passenger yields higher.

"The figures provide further evidence that the strategy of focusing on the premium sector of the market is working," noted Chris Tarry, an analyst with


, in a recent research note. (He rates the company a buy and his firm hasn't performed underwriting services for British Airways.)

In another effort to reach upscale customers, British Airways has introduced its "flying bed" to business class -- previously a luxury only for first class.

Further aiding British Airways' recovery (analysts are expecting a return to profitability for fiscal 2001) will be several tail winds in the form of macro trends. Excess capacity on the Atlantic routes caused by the meltdown in Asian economies appears to be lessening, as the Pacific region recovers. British Airways stands to gain the most from this capacity shift, since the bulk of its profit comes from shuttling passengers between Europe and the Americas.

Furthermore, with the majority of U.S. airlines reporting stronger-than-expected earnings for the March quarter, prospects are looking good for Europe. "Our investment thesis that European airline earnings should start to recover in 2000 is gathering steam," noted a recent

Schroder Salomon Smith Barney

report, which picks British Airways as its favorite in the sector. (The firm rates BA outperform, and it hasn't performed recent underwriting services for the company.)

Those factors aside, all is not blue skies for Eddington, the new CEO. A return to profitability means heavy cost cutting. That task will be made more difficult by steep fuel prices, although British Airways is hedged at $20 a barrel for about 60% of its fuel, a spokesman says.

More importantly, some of that cost cutting is likely to come in the form of layoffs, which could reopen British Airways' lingering labor wounds.

"There's no doubt we need to reduce costs," the spokesman says. "How much of that will come through a reduction in the number of people employed, we can't say."

How Eddington handles these layoffs will be crucial to British Airways' turnaround. Although lauded as a "people person," his track record is marred by labor scuffles. Less than a year after being appointed CEO of

Cathay Pacific Airways


, he faced a cabin crew strike over working conditions. The following year, he was involved in a skirmish with pilots over expatriate pay.

Yet, his ability to turn around and sell

Ansett Australia

, which he ran from 1997 until being tapped for BA's top spot, shows he understands how to cut costs without losing the support of the unions.

In addition to the current strategy, Eddington has several new options he can pursue should he choose. Industry observers expect British Airways to spin off


, its no-frills subsidiary.

"Go operates in a completely different segment," analyst Tarry notes. "It's one way for them to unlock value." He estimates go could fetch as much as

300 million.

British Airways declines to break out sales for go, but says it generated

20 million of pretax losses in its first 17 months of operations; it expects the division to break even in its third year. A sale of go "is speculation at the moment," the spokesman says. "We want to keep our options open."

British Airways is, however, more aggressively pursuing a sale of

Air Liberte

, its French subsidiary, to

Taitbout Antibes BV

, a Dutch investment consortium. The two are in exclusive talks.

Whatever the course, British Airways' shares are worth more than their current price, says Clemons, the money manager. He figures fair value is around

7 per share, or more than double their current price.

All of which means shares of British Airways could be getting ready for takeoff.