The board of British Airways has been forced to assess the impact of a possible £900 million reduction in profits this year caused by the rising price of oil.

Martin Broughton, the chairman of BA, admitted yesterday that the board had debated what would happen if the airline was in a “break-even position” by the end of this financial year.

This is a remarkable scenario for the company to be considering having just revealed record operating profits of £875 million last year.

However, BA's profits are expected to collapse in the coming months as the sustained high price of oil pushes up its costs.

In a conference call with investors, Mr Broughton said: “We had quite a debate at the board as to what happens if we get into a break-even position and the crude objective is not to get into a break-even situation but to stay profitable.”

This pessimistic outlook stunned investors who said it demonstrated how serious the coming downturn could be.

Nick van den Brul, aviation analyst at Exane BNP Paribas, said: “They are effectively admitting that profits could be zero in the worst-case scenario. There is clearly a lot of bad news to come.”

Willie Walsh, the chief executive of BA, also gave warning yesterday that the coming year would be difficult and the airline plans to cut the number of flights it offers next winter to reduce costs.

Mr Walsh also said it was “inevitable” that air fares would increase because of rising fuel prices. Oil prices have more than doubled in the past year and nearly a dozen carriers worldwide have already gone bankrupt because of high fuel costs.

Mr Walsh told The Times: “Oil costs are going to change the industry, there is not doubt about it. A lot of airlines are going to struggle and some may be unable to cope. We have already seen failures and I think we are going to see more.”

The company said yesterday that its profit margin had reached 10.4 per cent last year, which will trigger bonuses worth £35 million for its staff.However, Mr Walsh will not take his £625,000 bonus following the chaotic opening of Heathrow's Terminal 5 in March.

He said: “I felt it was inappropriate in the context of the disappointing opening of T5 that I take a bonus. I said to the chairman that it would be inappropriate and he agreed.”

Mr Walsh also apologised again for the cancelled flights and lost baggage that resulted from the move to T5 and insisted that the £4.3 billion terminal will now impress passengers.

BA's record profits last year will enable it to pay a dividend for the first time in seven years. However, the dividend will be only 5p a share, which analysts described as a “token effort”. It will almost certainly not be able to repeat the dividend payment this year as rising fuel costs cause profits to fall.

The airline has already reduced its profit margin forecast to 7 per cent this year and most analysts expect it to fall much further.

BA refused to give further guidance yesterday but Collins Stewart, the brokerage, said that if oil remained at more than $120 a barrel, pre-tax profits could fall by £840 million to just £40 million.

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts