British Airways warned today that air fares would have to rise after it announced an 88% plunge in pre-tax profits for the first quarter of the financial year.

BA chief executive Willie Walsh said the company was in "the worst trading environment" the aviation industry had faced and it was "absolutely inevitable" that fare levels would have to reflect the huge rise in the BA fuel bill.

BA also announced that it was reducing its winter 2008/09 capacity by 3.1%.

The carrier said its pre-tax profits for April-June were £37 million - an 87.6% dip compared with the £298 million figure for the same period last year.

Fuel costs were up 49% and Mr Walsh said the annual fuel bill was expected to top £3 billion - the equivalent of more than £8 million a day.

Mr Walsh said it was "impossible to say" how much fares would have to go up.

He said: "The main driver behind fare increases will be the high oil price. It's very clear that the industry is going to have to reflect this high price."

Mr Walsh continued: "We are in the worst trading environment the industry has ever faced.

"The combination of unprecedented oil prices, economic slowdown and weaker consumer confidence has led to substantially lower first-quarter profits.

"Fuel prices have doubled in the past year. A successful hedging programme mitigated the impact but nevertheless fuel costs at £706 million were up £233 million in the quarter."

BA had to endure a catastrophic opening of Heathrow's Terminal 5 (T5) in March, with flights cancelled, bags going astray and huge queues.

Today, Mr Walsh said T5 was "performing well" and six million passengers had travelled through the £4.3 billion terminal.

BA's first-quarter operating profit was £35 million compared with £266 million for the same period last year. Net debt dipped £206 million to £1.1 billion.

Passenger revenue rose 2.9% but weaker consumer confidence meant planes in March-June travelled 73.4% full - a 3.4% dip on the figure for the same time last year.

BA lowered its guidance for revenue growth in the full year from 4% to 3%, with non-fuel costs targeted to rise by 3% instead of the previous guidance of 3% to 3.5%.

The airline said it would be several months before its planned merger with Spanish carrier Iberia would be completed but it was confident of securing regulatory approval.

Talks about "further co-operation" with giant US carrier American Airlines were "progressing well".

Mr Walsh said it was "far too early to say" what impact the planned merger with Iberia would have on jobs at BA.

He added: "I believe a merger with Iberia is good for BA and for Iberia. If people are concerned about jobs, I have to say that long-term job security can best be achieved through strengthening BA through a merger like this."