Iberia today said its planned merger with British Airways is still on despite posting a €92.6 million (£83.1 million) first quarter net loss and warning that it was unlikely to climb into profit this year.

Analysts had feared that BA's hopes for pulling off a deal would be knocked off course by problems at the Spanish flag carrier.

Iberia, which warned last month that it was suffering under 'exceptionally difficult circumstances' published first quarter figures today showing a 15.6 per cent year-on-year plunge in its operating revenues to €1.1 billion.

It said the recession had combined with a catalogue of other problems including poor weather, pilots' strikes and competition from high-speed rail connections to trigger a loss of €92.6 million, up from €0.4 million a year ago.

But Fernando Conte, chairman of Iberia, said the group remained in merger talks with BA - they were just taking longer than expected.

He said the "volatility of the financial market and the impact on BA's pension deficit and also the complicated situation of our sector" was holding up talks.

Iberia's immediate priority, he said, was to focus on turning the company around.

The group today unveiled a crisis cost-cutting plan - including staff lay-offs and a hiring freeze - aimed at saving it between €110 and €125 million. It will also put on hold a planned €80-90 million of investment.

These moves, he said, were "the most important and immediate challenge of our company."

However, Mr Conte insisted that the group "remain(s) positive on the outcome of the negotiations."

Talks between BA and Iberia were revealed in August last year and have dragged on since. The two are seeking a merger to improve their financial strength amid the severe downturn in the aviation sector.

Willie Walsh, the chief executive of BA, told shareholders at the group's investor day in early March that the only remaining issue to be resolved was how the parent company would be controlled, triggering speculation that a deal was close. But last month, when Iberia first gave warning of its troubles, shares in BA lost 2.6 per cent on fears that the merger would be knocked off course. At midday BA shares were up 2p at 164.40p.

Iberia said it had taken crisis action to weather the problems — including downsizing its fleet and cutting costs. But it warned that the "exceptionally challenging" environment meant that it was "unlikely" to post a profit for the rest of the year.

The recession has hit the global airline industry hard with a slump in passenger demand. BAA, the operator of Heathrow, Gatwick and Stansted airports, recently revealed that passenger numbers fell by 10 per cent in the three monts to the end of March.

The cut in spending by the airlines also saw Boeing lose more aircraft orders than it gained during the first three months of the year.

Iberia said it had seen a "collapse" in business travel and "intense pressure" on fares. It blamed "one-off events" of pilots' strikes and heavy snowfall in January as well as the recession for a 15.6 per cent drop in sales to €1.1 billion.

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