KLM's hopes of making a profit are wiped out

KLM, the Dutch national airline, warned yesterday that it would make a loss in its current financial year, sending European airline shares into a tailspin. Only British Airways was able to climb above the turbulence as it reported good traffic figures for December.

The British carrier also reaffirmed it was on target to make a modest profit for the year ending in March.

BA's shares fell 2p to 143p but were off the 135.75p low for the day. Elsewhere Air France, Lufthansa and SAS shares were all dragged around 3% lower by KLM's warning that continued economic weakness and the threat of war in Iraq had forced it to abandon its prediction that it would make an operating profit.

KLM's warning surprised the market because it had appeared to be weathering the storm which has engulfed the airline industry since the terrorist attacks on the US in 2001.

The airline had been expecting an operating profit but is now saying this is unlikely even if the £160m charge for the split from former partner Alitalia is excluded. KLM's shares fell by nearly 7% as investors realised that more work was required by the company to shrink its cost base.

The Dutch airline's ability to win and retain passengers drove its load factor to a peak of 81.6% in September. But traffic has been under pressure since then and last month the load factor slipped 0.5 of a percentage point to 74.6% in December.

With volume and prices under pressure KLM has had to acknowledge that profitability in the short term will be driven by reduced costs rather than increased revenues.

Last month Leo van Wijk, KLM's chief executive, warned that the company would have to cut costs to prevent another loss next year. KLM has already cut some routes and said yesterday it was reviewing its capacity and route network.

The demand to keep costs under control was reinforced by BA as it explained how it was coping with difficult market conditions.

"Our December traffic figures are very good," George Stinnes, BA's head of investor relations, said. "But the outlook is very uncertain and the market is extremely tough. We still anticipate a modest pre-tax profit this year but we are seeing no signs of any improvements in revenue and our performance is being driven by cost reduction."

BA is forecasting that revenues this year will be lower than last year. However, it is benefiting from a cost-cutting programme which has led to sharp cuts in staff levels and the route network.

"Operationally it can be argued that BA is in better shape than it has ever been," one analyst said.

The airline reported a passenger load factor of 72.6% for the nine months to December up from 69.7% in the same period a year earlier.

Mr Stinnes said BA had been very succesful at winning passengers, but at the expense of yields. "We have had more success in the discounted markets than in filling our premium cabins," he said. "That is why we will rely more on our self-help programme than increased revenues in the near term."

Analysts believes the airline sector could still be vulnerable to a further decline in passenger numbers if there is war with Iraq. However, many airlines, including BA, have protected themselves against the recent rise in oil prices by hedging their fuel costs for some months in advance.