The cost of air travel looks set to rise again this year as British Airways, the UK's biggest full-service airline said that the soaring cost of fuel was becoming increasingly difficult to tackle.

BA's fuel bill will top £2 billion this year amid indications that economy passengers are already being deterred from flying by a consumer slowdown and high fares. Shares in the airline fell by 1.5 per cent to 327 p as analysts questioned whether BA would be able to maintain its margins in the face of the twin challenge of soaring fuel costs and an economic downturn.

The airline reported revenue figures up just 0.9 per cent in the period to Decmber 31, someway short of its full year guidance of 3 to 3.5 per cent. However, the third quarter performed better with revenues up 4.7 per cent, reflecting the airline's predictions that it would perform better in the second half of the year. Seat factor, a measure of how full BA's aeroplanes are, was down by 0.6 points to 77 per cent.

Fuel costs soared by £72 million in the third quarter, when the oil price hit the $100 a barrel record, and January bookings are lower than the previous year as the impact of wider economic gloom has started to hurt the airline.

However, despite gathering signs of a significant slowdown the airline is risking cannibalising its own premium market by launching a business class only service next year between London City airport and New York. The dedicated business class niche has been ferociously fought over in the last year, with one airline — MaxJet — already falling victim to the tough competition.

The airline stole a lead on arch-rival Virgin Atlantic to announce that it will operate a twice daily service from London City to New York next year on Airbus A318 aircraft with just 32 seats. However, the flight will have to stop on the West Coast of Ireland, probably at Shannon airport, for refuelling on the westbound journey - leading to a journey time of close to nine hours.

Last month, BA announced plans to launch a new airline, Open Skies, which will operate services to New York from Paris and Brussels.

The new service will be the first business-only operation from London City and is promising a 15-minute check-in designed to attract workers from the financial services sector in the City and Canary Wharf.

Mr Walsh said that the company was responding to its customer's needs with the niche service and would not cut any of its eleven flights a day from Heathrow.

He insisted that the airline was on track to achieve a 10 per cent operating margin by the end of the year, as it continued to take a tough stance on costs. Operating profit of £734 million for the first nine months, was 28.5 per cent higher than it was at the same point last year.

Mr Walsh said that the company was also sticking to its previous guidance of a 3 to 3.5 per cent increase in revenue in the full year in spite of weakness in short haul premium and some non-premium markets.

"Long haul premium traffic continues to be strong supporting our decision to make more premium capacity available," the company said in a statement. Club World and First performed strongly, driving premium traffic up 4.2 per cent.

Passenger revenue was 1.7 per cent higher at £5.7 billion, on capacity up 0.8 per cent. Yields were up 1.5 per cent as the airline attracted more premium passengers, although the gains were partially neutralised by the weakness of the dollar.

Fuel costs at the airline will continue to rise, the company said, and are now expected to be £100 million more than last year taking the fuel bill for the full year over £1 billion for the first time.

BA said that it would try to offset fuel costs by cutting costs in other areas but that attempts "to mitigate rising fuel costs next year will be challenging".

Mr Walsh, who took over as chief executive of the airline in 2005, has been aiming for a 10 per cent operating margin at BA by March 2008 — a target set by the previous chief executive, Rod Eddington. The airline insisted that it was still focusing its efforts on achieving that target this financial year, despite the challenges ahead.

BA is now 56 days away from moving into Terminal 5, which is expected to save the airline millions of pounds as baggage and security functions are streamlined. Pressure to cut costs at the airline has seen total costs fall by £101 million for the nine months, with unit costs down 1.5 per cent.

Employee costs have fallen by 6.9 per cent to almost £1.6 billion because of reduced pension costs and lower severance costs, today's statement said.

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