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Average fare yields pushed up Air France KLM's profits sharply in the first quarter, prompting the Franco-Dutch airline group to strengthen its forecast for the rest of the year.

The world's largest airline by revenues posted April-June current operating profit up 84 percent to EUR411 million euros (USD$529 million) from the same period a year ago.

Net profit more than doubled to EUR244 million (USD$314 million) from EUR112 million (USD$144.2 million), the airline said on Thursday.

Its adjusted operating margin rose 2.7 points to 8.0 percent.

It strengthened its outlook for the rest of the year, predicting a «significant» increase in operating profit rather than the simple increase it had previously forecast.

Air France and KLM, which operate separate fleets and networks under the umbrella of a common holding company, both raised fuel charges earlier this month after oil prices rose above USD$70 a barrel, though they have retreated somewhat.

Air France KLM had already reported an 11.9 percent rise in first quarter revenue to EUR5.802 billion (USD$7.47 billion), driven by all of its sectors, especially passenger business.

The yield -- revenue per passenger and kilometre flown -- rose 4.5 percent, and the group has benefited from hedging a higher proportion of its fuel bill than its rivals British Airways and Lufthansa.

The airline group reported its quarterly results amid mounting speculation of a merger with struggling Italian airline Alitalia.

Shares in Italy's largest airline rose more than 2 percent on Wednesday and another 1.5 percent on Thursday on speculation that talks between French and Italian government leaders on Friday might help shore up the long-awaited deal.

The French government owns 18 percent of Air France-KLM.

Analysts have also been speculating on a merger to help ensure the long-term survival of Italy's flag carrier, which has seen its share of the domestic market fall from around 80 percent at the end of 1994 to just over half at the end of 2005.

Earlier this month, a French newspaper reported that France was considering approving the merger if Italy's Enel renounced any intention to bid for French utility Suez. The government denied the report.

The airline industry is recovering from a battering from high fuel prices, while competition makes it difficult for carriers to raise fares.

International airlines association IATA on Thursday reduced its 2006 loss estimate for the global airline industry to USD$1.7 billion from USD$3 billion, helped by cost-cutting efforts and higher revenues.

Director-General Giovanni Bisignani said in an interview he saw no sign of slowing demand after British police said they foiled a plot to blow up trans-Atlantic flights, but said airports need to be better prepared for emergencies.

(Reuters)