bmi halves losses and rules out airline merger with Virgin

Britain's second biggest full-service airline, bmi, is expected to report tomorrow a halving in losses for last year to about £9m and to rule out a merger with Sir Richard Branson's Virgin Atlantic.

The group, which also owns a regional carrier and the latest entrant into the no-frills market, bmi baby, will also outline the progress made so far in its £100m cost-cutting programme.

The airline lost £19.8m in 2002 after the attacks of 11 September 2001 plunged the industry into a steep recession. Increased price competition from budget carriers such as Ryanair and easyJet also hurt bmi, which is predominantly a domestic and European carrier save for a handful of routes from Manchester to America.

Sir Richard Branson's long-haul airline Virgin Atlantic, which recorded a slight increase in profits for the year just ended compared with the £15.7m it made in 2002, has been courting bmi for some time with a view to a merger.

However, Sir Michael Bishop, who controls 50 per cent of bmi plus one share, has so far held out against a deal. Lufthansa holds 30 per cent less one share and the Scandinavian airline SAS the remainder.

Whereas Virgin is in expansion mode with plans to take on 1,400 staff, operate three new routes and place a $3bn order for 30 new aircraft, bmi is in the process of slimming its workforce. The Blue Sky initiative, launched in the middle of last year, involves some 1,500 job cuts at bmi - equivalent to nearly one-third of the workforce. As part of the plan to cut operating costs by some 18-20 per cent, bmi is also aiming to increase the proportion of tickets sold on the internet to 50 per cent and expand e-ticketing.

In a bid to fight back against the likes of Ryanair, bmi baby has grown in size from just two aircraft operating eight routes at its launch two years ago to a fleet now of 14 aircraft serving 40 destinations. Last year, bmi baby carried 1.7 million passengers.

The group is also expanding its long-haul network and starts services from Manchester to Toronto next month and to the Caribbean islands of Barbados, Antigua and St Lucia in November.