European carriers face a collective loss this year due to soaring fuel costs and slack demand and with spare capacity in the industry there is little room for airlines to hike fares.

"I would be surprised if we didn't see an accelerated activity in terms of consolidation in the airline industry driven by this situation," Rickard Gustafson, CEO of loss-making SAS said in an interview.

"I do believe that ... when capacity outruns demand in very tough market conditions ... that is a pretty lethal cocktail."

SAS is among the airlines most widely touted to be gobbled up in any industry reshuffle. Late in 2010, German carrier Lufthansa was rumoured to be close to making a bid for SAS, half owned by Sweden, Norway and Denmark.

Gustafson would not be drawn on the future ownership of SAS, which has failed to make a full-year profit since 2007 and has only been in the black in three of the last 11 years.

Recent years have seen a number of mergers with Air France fusing with KLM (AIRF.PA), British Airways and Iberia forming International Airlines Group (ICAG.L) as flag carriers look to cut costs and catch up with more nimble, no-frills airlines like Ryanair (RYA.I).

In the latest move, British Airways bought regional British airline bmi from German carrier Lufthansa (LHAG.DE). More than 1,000 jobs are set to go in the integration process.

FIT TO BE SOLD?

Unlike predecessor Mats Jansson, who was explicit about his goal of readying the airline for a takeover, Gustafson said he did not see his job as making SAS fit for sale though its state owners have all opened the door to an eventual deal.

"I know the owners have said they would like to do some kind of exit," he said. "But my strategy and my focus is how do we create ... a sustainable business model that is actually working and stands on its own merits."

Despite a decade of cost-cutting, SAS made a loss of 1.6 billion Swedish crowns in 2011, due to the bankruptcy of Spanair, in which it had a 10.9 percent stake.

The airline has speeded up its latest, 5 billion crown, efficiency programme, but has not given an outlook for the current year.

Getting back to profitability will be tough. In its latest report, The International Air Transport Association (IATA) said it expected Europe's airlines to make a collective loss of around $600 million this year due to soaring fuel prices.

SAS's fuel costs increased by nearly a third in 2011 to 7.8 billion crowns. Only payroll costs were a bigger part of expenses, according to the company's annual report.

European airlines face an additional burden from inclusion in the EU carbon trading scheme.

"I am extremely concerned about the way the European Union decided to implement this and basically open up for a trade war," Gustafson said.

"That would only have a negative impact on European carriers ... so let's go back to the drawing board with the ambitions to get a global trading scheme."

Despite the pressures on SAS, Gustafson said he did not expect the company to have to go to shareholders for more cash.

"At the moment we have a strong financial preparedness with close to 9 billion Swedish crowns in liquidity," he said.

"We have 12.4 billion crowns in equity. So at the moment, I do not really see the need."

SAS raised around 11 billion crowns in rights issues in 2009 and 2010.

The airline reports its first quarter results on May 3.

(Reporting by Simon Johnson; Editing by Jon Loades-Carter)

• A Permanent Economic Emergency