British Airways, Europe's third largest airline, has increased its profit forecasts after hikes to its fuel surcharges and the strong price of the dollar helped deliver a two-thirds jump in profits for its first financial quarter.

However, outgoing chief executive Rod Eddington warned that the high price of oil is likely to add a further £75 million to BA's fuel bill - which will now be £525 million more than last year.

Speaking at his last set of results as BA's boss, Mr Eddington said: "These are good results despite a 37.6 per cent increase in fuel costs. The improvement in passenger revenue is driven by more customers flying in the premium cabins."

At the same time BA reported that passenger volumes reached record levels on its flights last month, in the face of two terrorist attacks on London that were expected to put consumers off flying in the near term.

Traffic measured in "revenue passenger kilometres" was up 1.4 per cent in July compared with the previous year, with BA flights running at 81.1 per cent of their capacity.

Martin Broughton, BA's chairman, said: "Record passenger loads in July indicate that the short term impact of the London bombings was not material, although it is too early to say what the long term impact will be. When taken together with the uncertain economic outlook and volatility in both fuel prices and the US dollar exchange rate, accurate forecasting is even more of a challenge than usual."

"Market conditions, however, remain broadly unchanged."

With oil prices hovering around $60 a barrel, BA has increased the fuel surcharge it charges passengers four times in just over a year. In June, the airline lifted the levy on long-haul return flights to £48, from £32, and on short-haul flights to £16 from £10.

Shares in BA rose sharply higher in early deals this morning after BA upped its profit forecasts for the full year. However, in a falling London market, they later settled down to stand 2p higher at 292.5 in mid-morning trade.

Mr Broughton said: "The continuing strength of the US dollar and increased surcharges have improved the revenue outlook. We now expect total revenue for the year to March 2006 to grow by 5.5 - 6.5 per cent. Capacity and volume are still expected to increase by about 3 per cent with total yield flat."

Mr Eddington, who gives way to new chief executive Willie Walsh, said there was "still much work to be done" in order for BA to reach its target of an operating margin of 10 per cent.

Figures for this quarter show that BA's operating profits were £176 million, at an operating margin of 8.5 per cent.

But BA's revenues wer 8.3 per cent higher at £2.1 billion, with the quarter's profits coming in at the top end of analysts' predictions.

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