The airline posted a pre-tax loss of �19.6m for 2002, compared with a �12.4m profit the previous year.

Chairman Sir Michael Bishop described 2002 as an "exceptionally tough trading environment" and warned that 2003 also promised to be a "tough year".

But the airline did manage some good news, reporting a record 7.5 million passengers during 2002.

Signs of an upturn?

Like most airlines, BMI faced a struggle for business in the post-September 11 downturn in air travel, which was made worse by the global economic slowdown.

The run-up to the war in Iraq also hit confidence in air travel, but BMI said recent signs had been hopeful.

"The very recent signs of a slight upturn in confidence and bookings following the latest developments in Iraq may provide the prospect of a return to a more stable operating environment in the second half of the year," Sir Michael said.

He added that the airline's "vigorous cost-cutting programme" and greater efficiency would put BMI "on a sound footing in volatile market conditions".

BMI said the growth of its budget airline BMIbaby was "encouraging" with 700,000 passengers carried last year, and three million expected in 2003.