The turnaround in British Airways' fortunes has continued, with the airline reporting a profit above City expectations.

BA posted a �25m profit for the last three months of 2002, compared with a loss of �160m a year before.

We believe BA will survive and emerge as one of the winners in the peer group Merrill Lynch

The airline said it expected to report a profit for the full financial year if there were no hostilities in the Middle East.

But it warned the business environment would be tougher in 2003 than last year, and added it anticipated no revenue growth over the coming year.

Cost-cutting

Last May, BA reported a �200m loss - its worst result since privatisation - as it struggled against competition from budget airlines and the post-11 September downturn in passenger numbers.

The loss prompted a major restructuring programme which saw the airline cut thousands of jobs, reduce capacity and slash fares.

BA's chief executive, Rod Eddington, said the changes had left the airline "leaner, fitter and more competitive".

"Our total costs in the last 12 months are �1bn lower than the previous year."

War threat

The latest results mean BA has recorded a profit of �335m for the nine months to the end of December, compared with a loss of �115m at the same period last year.

But the prospect of a war with Iraq still poses a threat to the carrier's prospects.

BA's shares have fallen in recent weeks over fears that a conflict would put people off international travel and hit the airline's profits.

A war could also lift the price of aviation fuel, adding to the pressure on BA.

Yet analysts were, overall, optimistic about the carrier's prospects.

"We believe BA will survive and emerge as one of the winners in the peer group," Merrill Lynch said.

Analysts at Schroder Salomon Smith Barney said the carrier was the "best positioned among the flag carriers to benefit from an eventual return to normal economic and political conditions".

The bank credited the airline's "aggressive capacity, cost and balance sheet management actions".

BA shares stood 2.25p lower at 114p in lunchtime trade in London on Monday.