Lufthansa yesterday warned its profits would fall this year "irrespective of developments in Iraq" as weak traffic growth combined with falling fares.

Mr Jurgen Weber, the outgoing chief executive, said the crisis in the global aviation industry had intensified. "An end is not yet in sight and it will be prolonged as a result of the Iraq conflict."

It remained impossible to provide a clear earnings forecast for this year, given the international economic and political climate.

The gloomy outlook contrasted with the German flag-carrier's performance last year. It transformed a net loss of €633 million in 2001 into a net profit of €717 million in 2002, lifted by €513 million of exceptional gains. These included proceeds from the €414 million sale of Lufthansa's stake in logistics group DHL and the absence of the 2001 write-downs on LSG Skychefs, its catering subsidiary.

The airline cheered investors by restoring a dividend at €0.60 a share. Analysts had forecast a dividend of €0.40 a share after being forced to drop any payment to shareholders in 2001. The shares gained 0.6 per cent to reach €8.75 in late Frankfurt trading.

Operating profits increased from €28 million to €718 million, with turnover rising from €16.7 billion to €17 billion. Capital investment was cut from €3 billion to €880 million last year as the group sought to strengthen its balance sheet and conserve cash. Net indebtedness was cut from €3.8 billion to €1.1 billion.

The group's financial performance has begun to deteriorate again since late last year. It has also been engaged in a fare war on domestic routes and is facing intense competition from low-cost airlines operating in the German market.

The airline has announced a series of emergency measures to shore up profitability, including cutting capital investment by €200 million and imposing a recruitment freeze.

It warned it may have to ground additional aircraft to the 31 due to be pulled from service. - (Financial Times Service)