British Airways, which is in merger talks with Spanish airline Iberia, said yesterday that net profit dived 90 per cent in the first quarter, hit by surging fuel costs and a wider economic slowdown.

Profit after tax tumbled to £27 million (Dh200m) during the three months to June 30 compared with net profit of £274m in the same period a year earlier, BA said in an earnings statement.

Revenue grew by 2.8 per cent to £2.26 billion and pre-tax profit slumped by 88 per cent to £37m. Dealers said the results were in-line with expectations.

The aviation sector relies on kerosene to power its planes, a fuel refined from crude oil which last month struck record highs above $147 a barrel, almost double the price of a year ago.

"We are in the worst trading environment the industry has ever faced," BA Chief Executive Willie Walsh said yesterday.

BA said its net profit figure for the three months to June 30 compared with profit after tax of £274m during the same period in 2007.

The group said fuel costs had risen by 49 per cent to £706m in the first quarter.

"We expect our fuel bill to top £3bn this year – the equivalent of more than £8 million every day," the airline added.

Walsh said yesterday that BA was "well prepared" to battle the fuel-cost situation.

"Since year end we have adapted our plans to reflect the fast moving and challenging conditions. We have reduced capacity in the winter schedule without compromising our network and at the same time we have the flexibility in the business to capitalise when conditions improve.

"We have revised our capital expenditure plans and are focusing on cost control," added the chief executive.

BA's trading update comes three days after the airline said it was holding merger talks with Iberia aimed at creating the third largest airline in the world in terms of income with more than €16.5bn (Dh95bn).

An all-share tie-up would rival Air France-KLM, the world's biggest airline that was born in 2004 after the merger of France's national carrier and Dutch peer KLM.

It would create an airline that is dominant on both the north and south Atlantic routes. Iberia is the market leader on flights between Europe and Latin America while BA is strong on routes from London to the United States.

Under the tentative proposals BA and Iberia would retain their separate brands.

Walsh said it would be "several months" before the talks were finalised.