British Airways said on Monday that it will plunge into the red for the first time in seven years as passenger demand falls and costs rise because of a weaker currency.

The airline revised a prediction that it would break even in the year to March 31 and now expects to lose £150 million.

The worsening outlook was blamed on the dramatic devaluation of sterling in recent months, which has pushed up BA's costs. The pound is at a seven-year low against the dollar and at a record low against the euro.

BA, which is in merger talks with Iberia, the Spanish flag carrier, expects costs to rise by 8 per cent this year compared with an earlier estimate of 5 per cent. This is despite a collapse in the price of oil and the voluntary redundancy of 450 of the company's 1,500 managers.

The economic downturn and higher costs have affected all airlines, with at least two dozen being grounded in the past year. Virgin Atlantic announced yesterday that it would freeze staff pay to prevent job losses. Air France-KLM, one of Europe's largest airlines, issued a profit warning last week.

The International Air Transport Association has estimated that the global aviation industry lost $5 billion during 2008 and will lose a further $2.9 billion this year.

BA's profit warning pushed its share price down 12.4p to 133.8p, valuing the carrier at just £1.54 billion. This is lower than Iberia's market capitalisation, which has concerned some BA shareholders as they had been looking to own a majority of the combined company after the merger.

Willie Walsh, the chief executive of BA, warned last weekend that he would not pursue the deal if Iberia tried to push for a merger of equals.

In its statement yesterday, BA said that fuel costs were expected to remain in line with previous guidance at about £3 billion this year. The price of oil has fallen from its peak of $147 a barrel last July to $49 a barrel yesterday but these gains have been wiped out by the devaluation of sterling. BA also hedged its fuel costs, leaving it to pay a higher price for some of its fuel.

In the three months to December 31, BA said that it had lost £50 million. The airline added that this included £56 million from the recalculation of costs, such as air traffic control and airport fees paid due to the devaluation of sterling.

BA had one positive indicator yesterday as it said that revenue for 2008-09 will be 4 per cent higher at £9.1 billion, which analysts said was a strong result, given the weakness in demand.

BA gave no further information on its traffic numbers but said that they were in line with the industry. Last month, BA's premium traffic fell by 13 per cent and economy passengers by nearly 2 per cent.

In its statement, BA said: “Further economic weakness in January and the outlook for February and March combined with the fall in sterling are impacting our outlook for the year ended 31 March 2009.”

BA's previous loss was £200 million in 2001-02 when the airline sector was hit by lower demand after the terrorist attacks on September 11 and the impact of SARS in Asia.

Virgin said yesterday that it will seek to cut costs by imposing a pay freeze on its 9,000 staff for one year, which “will help us to remain strong during a period of lower demand”.

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