KLM plunges airlines into gloom

DUTCH flag carrier KLM plunged the aviation industry into New Year gloom today by warning it is likely to make a substantial loss for the year as passenger numbers remain poor. The news, blamed on fears of war in Iraq, weighed heavily on British Airways, which only recently clawed its way back into the FTSE 100 index. Its shares were down as much as 7p, or nearly 5%, at 138p.

The downbeat message also set tongues wagging over KLM's future as an independent airline. Air France is trying to forge closer links with it and KLM executives have not ruled out reopening talks with BA.

In a surprise statement which initially took 9% off its own shares, KLM said: 'During the quarter ending in December, the industry has experienced adverse changes in the operating environment. The impact of deteriorating economic conditions as well as geo-political instability in certain regions in the world, which also had its effect on oil prices, resulted in lower than expected traffic volumes and yields.'

It forecast trading would remain difficult in the current quarter, the last of its financial year, adding: 'It is unlikely that a positive operating income - excluding any effects of the Alitalia arbitration award - for the year ending 31 March will be achievable.'

KLM expects to have to pay e150m (£98m) in damages to settle a three-year dispute with the Italian airline. For December, KLM reported traffic on its airliners up by only 6% year-on-year, a poor performance considering the aviation industry was still in a state of chaos 12 months ago after 9/11.

The number of passengers carried last month rose 11%, 24% on North Atlantic routes, the worst affected by 9/11. The passenger statistics, up only 1% on figures two years ago, are flattered by the incorporation of numbers flying on its fast-expanding, UK-based no-frills airline Buzz.

Cargo traffic on KLM flights was flat year-on-year. North Atlantic cargo traffic, often seen as an indicator of general economic well-being, was down 4%.

Air France is reckoned to be favourite to merge with KLM in the long term and has been wooing the Dutch to join and bolster its Skyteam alliance of international airlines, the weakest of the global partnerships behind Lufthansa's Star Alliance and BA's Oneworld.