The company, which this weekend started selling off two million flights at bargain prices said the strong pound was giving European rivals an increased chance to compete on tariffs.

BA is rumoured to be ordering 34 jets Boeing

This had forced BA to cut back on some services, bringing a reduction in passenger numbers.

Further problems were also caused by the Asian crisis, which was also hitting demand for BA flights.

Pre-tax profits for the three months to June 30 were £145m, down on last year's £220m.

However, after stripping out one-off gains from last year including the sale of a stake in US Airways, operating profits improved from £140m to £173m.

Turnover improved only 3% - from £2.22bn to £2.29bn.

Bob Ayling, chief executive, said: "These are a good set of results which could not have been brought about without our business efficiency cost saving programme.

"We have been forced to scale back services to the Far East but we believe those are good markets in the long term and we have transferred our capacity to South America and other regions."

Passenger numbers increased by 7.6% to 9.5 million during the period.

Mr Ayling said around 70,000 of the two million flights had been sold by its telesales unit.

He denied the figures were disappointing, saying: "I am very pleased indeed. It was a very novel idea."

He added that more sales had come in from travel shops and the internet which had not yet been counted.

American alliance

The group said it was on track to deliver its targeted one billion pounds of annual savings by the year 2000.

Mr Ayling said he was still hoping to bring about an alliance with American Airlines during next year despite regulatory wrangles.

European regulators are insisting that BA gives away 267 take-off and landing slots at Heathrow in order to decrease its market power, but BA wants to be given the right to sell them.

Mr Ayling, said he welcomed the recent advice from the Office of Fair Trading to the government to clear the proposed alliance.

He said: "We were pleased with what the OFT said, in particular, its comments on slot trading. We will now be studying its advice."

Boeing speculation

However British Airways has so far declined to comment on a report in the Sunday Times that it is poised to announce an order of £2bn for up to 34 jets from Boeing.

The Sunday Times reported that the purchase of the Boeing 777 jets will precede an order of £3bn for more than 100 short-haul Airbuses.

The paper said that Rolls-Royce has emerged as the frontrunner to provide the engines for the Boeing 777 aircraft - ahead of General Electric of the US and United Technologies' Pratt & Whitney unit - in a deal valued at £500m.

GE currently provides the engines for BA's existing Boeing 777 fleet.