Aer Lingus produced an increase of 11.6 per cent in operating profits in 2000 but warned it will suffer an operating loss for this year. The airline is expected to implement radical measures to reverse the losses.

The airline's chairman, Mr Bernie Cahill, said the softening economies in a number of markets, rising fuel costs and the strength of the US dollar were now causing a serious downward revision of current year profit forecasts in the international aviation sector.

The state carrier is expected to record a net loss of £20 million (#25.4 million) this year and is likely to reduce capacity on key routes in a bid to turn around its performance.

Acting group chief executive Mr John O'Donovan blamed economic sluggishness in key markets and the fallout from the foot-and-mouth crisis for its poor financial performance this year. He said while Aer Lingus was not immune to the serious trading issues brought about by the economic downturn, it had already started a "fundamental review" of the actions required to deal with the current trading situation effectively.

"Aer Lingus will now implement a root-and-branch review of all its operations - capacity, schedules, costs and revenues - as the company faces a different set of challenges as we go forward," Mr O Donovan said.

The intention was to "return the business to profit and to a position to benefit from growth as the industry emerges from this current down cycle," he said in a results statement for 2000.

Air traffic, which grew 6 per cent in 2000, is expected to be down 10 per cent this year. Aer Lingus reported operating profits of #79.9 million in the 12 months to end-December last and a 21 per cent increase in turnover to #1,372.5 million. Capacity last year rose 13.2 per cent, benefiting from the addition of an two Airbuses and increased frequency on many routes, while passenger numbers last year rose to 6.9 million, up from 6.5 million the previous year.

The operating margin for the group was down 0.5 per cent to 5.8 per cent which, it said, was due to reduced profits in its charter subsidiary, Futura.

Things have gone from bad to worse for the state airline this year. It has been dogged by industrial disputes, had to foot the bill for pay rises it could ill-afford and terminated the contract of its chief executive, Mr Michael Foley, after a controversial court case brought about by employees citing sexual harrassment.

It is likely to lose further business on its Scottish service as a price war hots up between Ryanair and new entrant, UK budget airline Go, on routes to Edinburgh and Glasgow.

Aer Lingus has set up a board subcommittee to recruit a successor to Mr Michael Foley. Mr O'Donovan, who is also group finance director, has told the board he will not be putting his name forward to succeed Mr Foley.