The two airlines, which first began talks in early June, are considering a transaction in which BA, the larger of the two carriers, would acquire KLM. However, the discussions face a series of hurdles, including potential competition concerns from regulatory authorities and US scrutiny over KLM's role, as a BA unit, in US-UK aviation treaties. As a Dutch airline, KLM benefits from a liberal US-Dutch aviation treaty.

But open skies agreements between the US and Britain remain far more strict and complex, after years of fruitless negotiations.Meanwhile, BA is pushing ahead in efforts to get its financial house in order after a dismal fiscal 1999. The carrier's new chief executive, Rod Eddington said the airline is proceeding with "cautious optimism" and that "there are some good signs" ahead.

On Monday, the airline released earnings figures for the fiscal first-quarter ended June 30 that were largely in line with analysts' expectations. BA posted profit before tax and disposal losses of eight million pounds ($12.1 million or 13.3 million euros), down 65 per cent from 23 million pounds during the year-earlier period. Operating profit during the period climbed to 97 million pounds from 94 million pounds during the first fiscal quarter of 1999. But higher fuel costs, a strong pound and competition from other carriers continue to cloud its horizons, analysts said. Though figures indicate that the airline is succeeding in efforts to fill higher-cost seats and boost premium traffic, other factors are likely to make the rest of 2000 another challenging period.

"Yield numbers are moving in the right direction," said Deutsche Bank (London) aviation analyst Jonathan Wober. "But even if it had not had huge fuel costs, we would still be struggling to get BA on track for profitability for the full year.