By Simon Montague BBC Transport Correspondent

The world's airlines are facing losses totalling US $5 billion (�3.2 billion) on international services this year, according to a new forecast.

And weak demand for air travel is expected to persist into next year, the International Air Transport Association (IATA) has warned at its annual outlook conference in Madrid, Spain.

The industry's losses are likely to be concentrated on international flights to and from North America, where the aviation market has been devastated by an economic downturn, plus the impact of the 11 September terror attacks last year.

This year's forecast compares with losses of $12 billion (�7.7 billion) in 2001.

'Painful adjustment'

In Europe, British Airways is expected to make a pre-tax loss of �20m this year.

But a few of the bigger continental airlines like Air France, Iberia and Lufthansa, which are less dependent on transatlantic travel, look set to remain profitable.

US airlines continue to suffer from a huge drop in business, with revenues 25% down on the previous year.

They are still going through a "painful adjustment of capacity to weak demand" says IATA's chief economist Peter Morris.

"The cost picture is bleak," he adds, with fuel and security prices rising, while fares have been slashed.

The only way to keep flying is to cut other costs, such as jobs and capacity.

Asia leads recovery

In the longer term, full service carriers are worried that key corporate customers are changing their corporate travel policies, flying less and in cheaper seats or switching to low cost airlines.

The best outlook is in the Asia Pacific region, where airlines which suffered bad times in the late 1990s have retrenched and are now doing relatively well.

IATA expects some global improvement in 2003, with around 5% growth in traffic and capacity, and a profits forecast of $2 billion (�1.3 billion) on international routes.

But those figures depend heavily on economic growth and corporate recovery.

If the world economy doesn't pick up, the pessimistic forecast is that international flights could still be losing money at the end of next year.