KLM is one of Europe's better-run airlines

The carrier said that the Iraqi war and the Asian pneumonia outbreak had damaged the fortunes of all airlines, at a time when returns in the business were already low.

As a result, it plans to outline what it called "far-reaching measures to effect a direct improvement in results".

The airline has not yet given details of any cuts in jobs or services, but said the whole package would cut its costs by 10%.

KLM said that forced job losses would be inevitable, and that it had already opened discussions with its unions.

Talking tough

The immediate consequence of KLM's decision is that hiring has been frozen, and all current investments are being re-examined.

The airline said it was being extremely tough.

"A conscious choice has been made to avoid any measures which only add incidentally to cost savings," it warned.

The airline has set up an internal working group to promote cost savings, and has asked its various business units to come up with ideas for reducing expenditure.

Although KLM made certain to adopt a positive, punchy tone, its announcement caught the markets by surprise.

The airline's shares fell 2.4% - in an otherwise positive market - on the news.

Europe feels the pain

KLM has generally been seen as one of Europe's better-managed airlines.

It has taken a sharp line on costs for longer than some of its rivals, and maintained strong results even after 11 September, when several European carriers failed.

In January, it warned that it might fall into the red for the year to end-March, because fuel prices were rising while traffic remained at best stagnant.

KLM's cost-cutting announcement is seen as a further sign that Europe cannot remain immune to the wave of bad news that has flooded the airline sector - mainly in the US - since the beginning of the Iraq crisis.

British Airways, Air France and Lufthansa have already cut their schedules or warned investors about weakening results, but KLM remains the first European airline to admit that job losses are inevitable.