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British Airways, planning a merger with Spain's Iberia, says first-quarter profit fell 90% and cut its revenue forecast on record fuel costs and slumping demand for air travel.British Airways dropped as much as 5.9% in London. Net income plunged to 27 million pounds ($A56 million) in the three months to June 30 from 274 million pounds a year earlier, the London-based airline said today in a statement. Analysts had predicted profit of 35 million pounds, according to the median of three estimates."We are in the worst trading environment the industry has ever faced,'' chief executive Willie Walsh said.British Airways plans to raise fares, reduce passenger capacity, stop hiring and merge with Madrid-based Iberia to lower spending on planes, maintenance and staffing."Conditions are tremendously difficult, so it is going to be a tough year ahead,'' Douglas McNeill, an analyst at Blue Oar Securities in London, said."British Airways is at least going into it with a good balance sheet.''British Airways predicted revenue would rise by 3% this year, reducing a previous forecast of a 4% gain. Sales advanced 2.8% to 2.26 billion pounds in the first quarter. Walsh plans to cut seats by as much as 5% and said today that price increases were "inevitable.''Stock declineBritish Airways fell as much as 15 pence to 240.25 pence and was down 2.3% at 8:21 a.m. in London. The stock has declined 19% this year, giving BA a market value of 2.88 billion pounds. The Bloomberg Europe Airlines Index has plummeted 29%."The combination of unprecedented oil prices, economic slowdown and weaker consumer confidence has led to substantially lower first-quarter profits,'' Mr Walsh said.The price of crude oil rose 63% in the past year, wiping out airline profits. At least 24 carriers have stopped flying or filed for bankruptcy this year because of higher fuel expenses and the industry's losses may surpass $6.1 billion this year, according to the International Air Transport Association.British Airways expects its fuel bill to rise 50% to 3 billion pounds this year. Even so, the airline reduced its prediction of the affect that rising oil prices will have. Every $1 change in the crude oil price will have an 8 million-pound effect on profit, the airline said, down from an earlier forecast of 16 million pounds.Fuel hedging"The result came in lower than expected but their guidance is actually a bit better than expected, given the fact that they've accelerated their hedging,'' said Yan Derocles, an analyst at Oddo Securities in Paris who has a "reduce'' rating on the shares. He said the improved guidance would allow him to raise his forecast.

A merger with Iberia "is a sensible strategic move which will bring consolidations and some cost savings,'' Mr McNeill said.The new company will have two fleets and a dual listing in London and Madrid. British Airways makes its highest margins on premium traffic to the US. The Spanish carrier will add the most dense flight network in Latin America to the combined company."I'm pleased to say that talks towards a merger with Iberia are under way,'' Mr Walsh said."This is good news for both airlines, our shareholders and our customers.'' He said it will be several months before talks are complete and expressed confidence in winning regulatory approval.AlliancesBritish Airways and Iberia are both members of the OneWorld alliance of carriers. The British carrier has been in talks with AMR Corp's American Airlines, also a OneWorld member, about closer cooperation on trans-Atlantic routes.Industry woes have prompted consolidation including the planned merger of Delta Air Lines Inc. and Northwest Airlines in the US Air France-KLM Group, Europe's biggest carrier, and Delta agreed last October to operate trans-Atlantic flights jointly.Merrill Lynch cut earnings estimates for British Airways on July 22 primarily because of fuel costs. "Our near-term view on European airlines remains cautious,'' analysts led by London- based Samantha Gleave said.The profit result is the worst for the April through June period at British Airways in five years. In the same period in 2003, the carrier reported a loss of 63 million pounds.Margin goalLast fiscal year, Mr Walsh, 46, led British Airways to a record 10% operating margin and paid stockholders their first dividend since 2001. Mr Walsh is known for trimming costs at his previous position as head of Aer Lingus, Ireland's second-biggest airline after Ryanair.BA's most recent acquisition was the $US107.6 million purchase this year of L'Avion, a French business class-only carrier that will be combined with the airline's OpenSkies unit.OpenSkies was created to take advantage of the US- European Union treaty of the same name, which allows airlines to fly between the US and any of the bloc's nations instead of just their home countries. The treaty opened BA's most profitable routes from London Heathrow to new competition.