AMR Corporation, the parent of American Airlines, has described conditions for its company as "treacherous", as a slow world economy, terrorist threats and the possibility of a war with Iraq threaten its business.

The group pledged to make savings of $4bn (�2.6bn) in a bid to survive the bleak conditions, but said its performance to date continued to be unacceptable.

The news came as AMR reported losses of $529m for the three months to December, and $3.5bn for the whole of 2002 - the largest yearly loss in aviation history.

"Clearly, results such as the ones we reported today are unsustainable," said Don Carty, AMR's chairman and chief executive.

More cuts

The company said it had already identified savings of $2bn but that this was not enough to cope with the falling demand.

We believe that a permanent shift has occurred in the airline revenue environment Don Carty, AMR chairman and chief executive

"The future of the company cannot be assured until ways are found to lower significantly its labour costs and other costs," said AMR in a statement.

Last week, American Airlines asked its employees to help the airline survive by forgoing pay rises.

Airline worker unions are currently considering a request to freeze wages and trying to establish a new contract.

American Airlines is not alone in trying to reduce its wage bill.

Rival United Airlines is also looking to cut its employee wages significantly as it struggles to emerge from bankruptcy protection.

But American Airlines claims it has more favourable terms for paying debts and therefore lower costs.

Not enough

Mr Carty praised staff for their "tremendous strides" so far in cutting costs.

The measures include automatic ticket check-ins, cutting down on its domestic schedule and holding off any further purchases.

But Mr Carty said: "While there are many factors that impacted our results during 2002, including a sluggish economy, high fuel prices, lingering concerns over terrorism and the possibility of a war in the Middle East, the core issue for our company remains our cost structure that is out of step with the revenue environment facing domestic airlines."

He added that the changes to the airline industry now required permanent steps to reduce costs.

"We believe that a permanent shift has occurred in the airline revenue environment."