The outlook for the second half is difficult to predict, although we anticipate a significant operating loss for the year

Lord Marshall, BA chairman

It announced profits of �5m for the second quarter of the financial year, compared to profits of �200m for the same period last year, a fall of 98%.

The huge drop reflects an unprecedented downturn in traffic following the 11 September terror attacks on the United States.

But BA's fortunes are set to get significantly worse, with the City expecting massive losses in the region of �750m by the end of the financial year, in April.

BA chairman Lord Marshall acknowledged that the situation was dire: "The outlook for the second half is difficult to predict, although we anticipate a significant operating loss for the year."

It would be the first time the airline has failed to make a profit year-on-year since it was privatised in 1987.

BA 'will survive crisis'

BA chief executive Rod Eddington has said he is confident that BA can survive the current crisis, as it had �1.1bn in cash reserves and could draw on a further �800m.

It also has reasonably liquid assets, including property and a stake in Australian carrier Qantas, although it has no plans to sell these at the moment.

The airline, which was struggling with over capacity before 11 September has axed 7,200 jobs so far this year in an effort to cut costs.

It is thought to be burning through about �2m in cash a day and is widely expected to approach the government for financial help.

Further job cuts have not been ruled out.

Traffic slump

On Monday, BA said it had suffered a 25% fall in traffic in October, although this was better than than 30% fall predicted by some analysts.

BA shares fell sharply ahead of the release of the traffic statistics but the smaller than expected downturn lifted the stock back into the black.

BA shares jumped 5 points as the markets opened on Monday, before falling back to 156.25, one point ahead of Monday's closing price.

However, there were still fears that BA faced relegation from the blue chip FTSE 100 index.

Tony Craze, of Christows stockbrokers, told BBC Radio 4's Today programme that FTSE relegation was a very real possibility, which would be a "disaster" for Mr Eddington.

He said Lehman Brothers were suggesting that BA stock was worth just 80p.

Weak future

In its traffic statement, BA said bookings in some areas could pick up by the end of the year.

"Forward bookings for November indicate a similar traffic decline to October, with the US, Middle East and Japan being the worst affected markets," BA said.

But "early indications for December suggest a slight improvement on November", the airline said.

KLM deal

Mr Eddington said BA was still in talks with KLM over a possible merger.

The Dutch carrier unveiled an 18% fall in passenger traffic following the attacks in the US.

It said the biggest decline was on North Atlantic routes, traffic dropped by 34%.

There were also falls in traffic in Europe, Asia Pacific, the Middle East and South Asia, but an increase in passengers in Africa and Mid-South Atlantic.

KLM said it had cut capacity by 5%.