It is to reduce capacity by 12% over the next three years, with a cut in the number of unprofitable routes and a switch to smaller aircraft.

The announcement came as BA reported a sharp fall in its operating profits - to £94m from £173m a year earlier - for the three months to 30 June.

Low demand

The company, trying to put the fiasco of its decision to axe the Union Flag from its tailfins behind it, has been struggling because of fierce competition and price-cutting from other carriers.

It says that the lucrative international business and first-class market has been hit by the slowdown in the Far East last year and a sluggish European economy this year.

BA has faced competition on Atlantic routes from the likes of Virgin

This has led to businesses cutting back on international travel budgets, leading to industry-wide overcapacity, especially across the Atlantic and on long-haul routes.

BA's response has been to switch its orders of new planes from Boeing 747s to smaller Boeing 777s.

Most of the fall in capacity will be among the less profitable economy seats. The 777 holds the same number of business and first class seats as the 747 but has 130 fewer in economy.

With a greater proportion of the higher rate passengers on its flights, BA believes it will be able to increase the profit made per flight.

Its strategy has come at a time when other airlines have been increasing capacity and there has been fast growth for budget and low cost airlines, including its own Go subsidiary.

Chief executive Bob Ayling: Keen to focus on business passengers

Chief executive Bob Ayling said that as part of its wider plan to trim routes less popular with business customers, it is pulling out of its services to Jakarta, Indonesia and Pittsburgh in the US. It will increase capacity to Dubai.

"British Airways will emerge from current market conditions with lower costs and a young aircraft fleet focused on the most profitable sections of the market," said Mr Ayling.

However, the company warned that trading conditions remained extremely tough, with heavy discounting on North Atlantic routes and few signs of recovery in the Far East.

The second quarter of the year would be "significantly affected" by continuing oversupply.

Concorde plans

But it was tough to forecast the extent of the damage to profits because the trend towards last-minute sales of seats made forward bookings an unreliable gauge of future performance.

BA said its on-going cost savings programme was proceeding on schedule. Savings last year reached £750m and BA was on course to save a total of £1bn by the 2001-2002 financial year.

BA also announced plans for a £14m refurbishment of Concorde's interior and the creation of a luxurious departure lounge at Heathrow.

The decline in operating profits was masked by the £177m in gains from sales of assets, primarily of the airline's remaining interest in Galileo International.

Including these exceptional items pre-tax profits came in at £200m compared to £145m a year ago. Sales were down 2.5% at £2.222bn from £2.278bn.