"Demand in London remains strong," IAG (ICAG.L) said in a results statement on Friday. "The Spanish and wider euro zone macro-economic background deteriorated in Q1, and this is reflected in a worsening commercial performance from our Madrid hub."

The company reported an operating loss of 249 million euros before exceptional items in the traditionally weak first quarter of the year, up from a 102 million euro loss a year ago.

Analysts had expected a figure of between 230 million and 250 million euros, according to the company.

Revenue for the quarter rose 7.8 percent versus a year earlier to 3.9 billion euros.

Chief Executive Willie Walsh said strong demand for premium long-haul flights out of London, particularly on transatlantic routes, showed no sign of abating with the British capital having apparently sidestepped the latest recession.

"The sales and revenue side of the (British Airways) business is doing very well, it's the fuel cost that's the main headwind we face," he told reporters during a conference call.

The group's fuel costs for the quarter were 24.9 percent higher than a year earlier at 1.4 billion euros.

Traffic figures from British airport operator BAA, which is majority owned by Spain's Ferrovial (FER.MC), also indicated that premium and business travel remains strong out of London, even if the lower end of the market is still shrinking.

The operator said 5.8 million passengers passed through Heathrow during April, marginally up on a year earlier after what it described as "another record month" for London's main long-haul hub.

Reflecting the broader economic weakness, traffic at Stansted airport, which is popular with budget airlines flying into London, was down 2.7 percent and group-wide cargo was 1.1 percent weaker, driven by a 2.5 percent drop at Heathrow.

The airline operator said Iberia made an operating loss of 170 million euros in the first three months of the year while the loss at British Airways was less than half that at 62 million pounds.

European airlines often lose money in the post-Christmas lull which is a traditionally quiet time for holiday travel.

For the full year IAG said the prospect of a 1 billion euro rise in its fuel bill, combined with 90 million euros worth of restructuring costs stemming from its acquisition of bmi, meant it would struggle to make any money this year, predicting operating results would be "around the breakeven level".

Shares in the group were down 2.2 percent at 159.4 pence at 0813 GMT, underperforming a 0.4 percent weaker bluechip FTSE index .FTSE.

"IAGs second year is going to be much less good than its first," Charles Stanley analyst Douglas McNeill wrote in a note to clients. "We retain our positive view on the stock on the grounds that the market underestimates the benefits that will flow from the original merger and the more recent acquisition of British Midland (bmi)."

(Editing by Neil Maidment)

• A Permanent Economic Emergency