The European aviation sector suffered another blow today when two of the Continent's largest carriers, Iberia and Air France-KLM, reported a massive collapse in profits.

Iberia, the Spanish flag carrier, said its operating loss in the first six months of this year was €32 million (£25.3 million) , a 146 per cent fall on the same period last year. Air France-KLM, Europe's third largest airline by passenger numbers, said its first-quarter pre-tax income had fallen 58 per cent to €251 million.

The profits fall at both airlines was blamed on rising costs, particularly that of fuel. Sustained high oil prices are putting pressure on airlines around the world and carriers are responding by raising fares and cutting the number of flights they offer.

Iberia announced last week that it had entered merger talks with British Airways in a move widely regarded as an attempt to cope with high fuel costs. The merger would create a single holding company that owns the two operating units, giving them opportunities to share costs.

Iberia's revenues in the first half were up slightly to €2.6 billion but it experienced a large fall in domestic passenger numbers due to the launch of a high-speed rail link between Barcelona and Madrid. The airline has reduced its domestic capacity by 15 per cent as a result and plans a further reduction later this year as Europe's economy continues to slow.

Air France-KLM increased its revenues by 5.8 per cent to €6.3 billion but this was offset by a 24 per cent increase in its fuel bill to €1.4 billion. The airline said it would respond to higher fuel costs and the worsening economic environment by extending its cost-cutting programme by nearly 50 per cent to €620 million this year.

Last week British Airways revealed that its first-quarter profits had fallen 88 per cent to £37 million because of sustained high fuel prices. The British flag carrier gave warning that Europe's aviation industry was facing the most difficult trading environment it had experienced. Analysts believe that the combination of rising costs and weakening demand could force many carriers out of business in the coming year.

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