British Airways posted lower-than-expected third-quarter losses yesterday and said a rise in average passenger revenues showed its strategy of focussing on the more profitable seats on its flights was bearing fruit.

But lingering concerns over low air fares and surging fuel prices, as well as doubts over BA's ability to sustain another three years of cost cuts, erased initial gains, dragging shares in Europe's biggest airline to their lowest close since 1993.

BA reported third-quarter operating losses of £2 million sterling, compared with a £92 million profit a year ago, and pre-tax losses of £60 million, from a £75 million loss a year earlier.

Analysts, who had been expecting operating losses of around £24 million, noted that the results showed an important improvement in yields, and BA shares initially rose to 325p. But they reversed midday and closed 3.24 per cent down at 299p.

In its statement, BA said market conditions remained challenging. The airline, which last week raised business and economy fares on Atlantic routes to offset a rise in fuel costs, said fuel and oil spending was 28 per cent higher year-on-year in the quarter.

Underlying unit costs for the quarter were up one per cent, but the figure rose to 5.1 per cent when fuel charges and provisions made for an employee profitshare scheme were included.

Yields (average revenue per passenger per kilometre) rose 3.2 per cent in the quarter after a fall of 7.1 and 5.2 per cent respectively in the first and second quarters. Analysts said that 2.5 per cent of that improvement could be attributed to BA's new focus on flying a relatively greater proportion of higher-paying business travellers than economy ones. The rest was due to a better management of the economy cabin.

BA aims to turn around its fortunes by cutting capacity by at least 12 per cent over the next three years. By dropping less profitable routes and using smaller planes with relatively more business travellers, it is confident yields will rise.