July 31 (Bloomberg) -- British Airways Plc rose the most in 12 weeks after the carrier said passenger numbers and seat occupancy are showing signs of improvement, suggesting it may recover from the recession faster than Air France-KLM Group.

British Airways had a 106 million-pound ($175 million) net loss in the three months through June, it said today. Air France lost 431 million euros ($608 million), more than the 194 million euros expected by analysts. The stock fell 4.1 percent.

BA advanced 6 percent after Chief Executive Officer Willie Walsh said that while yields or ticket prices may fall further, volumes and occupancy at the London-based company are likely to improve in the next few months. Quarterly sales fell 12 percent to 1.98 billion pounds, compared with a 19 percent decline at Paris-based Air France.

“It’s fair to say British Airways’ numbers are outperforming relative to Air France and that the outlook statement is a little more bullish,” said Stephen Furlong, an analyst at Davy Stockbrokers in Dublin. “If it’s a volume and price game, at least it’s a move in the right direction.”

British Airways rose 8.1 pence to 142.4 pence in London, the biggest gain since May 5. That pared the stock’s decline this year to 21 percent, giving the company a market value of 1.64 billion pounds.

Air France-KLM, Europe’s biggest airline, fell 38 cents to 8.83 euros, the biggest drop since July 2. It has declined 3.7 percent this year, for a value of 2.65 billion euros.

Lagging Lufthansa

Air France’s results are also lagging behind those of Cologne, Germany-based Deutsche Lufthansa AG, the regional No. 2, which posted a 216 million-euro second-quarter loss July 29.

“Air France is evidently underperforming its peers by a considerable margin,” RBS analyst Andrew Lobbenberg said today in a note to investors, adding that the company “may have less flexibility to reduce costs.”

Lobbenberg downgraded Air France stock to “sell” from “hold.” He has “buy” ratings on British Airways and on Lufthansa, which he says is “the lowest risk” investment among network carriers.

Analysts had predicted a net loss of 95 million pounds for BA, which had a year-earlier earnings of 27 million pounds. Air France’s prior-year profit was 132 million euros.

British Airways has delayed plane deliveries, cut back on in-flight catering and is in talks to eliminate as many as 4,000 jobs to help reduce costs and survive the recession. Walsh said this month that Europe’s third-largest carrier had also raised $1 billion in new funds to bolster cash reserves.

Lower Surcharge

A decline in yields, or average passenger revenues, will accelerate this quarter as fewer people fly in first- and business class seats and a drop in the price of oil prompts the carrier to cut surcharges on ticket prices, BA said.

That will limit the impact of an improvement in passenger volumes and occupancy this summer, making a deal with unions on job cuts and pay even more vital, the CEO said.

“The industry continues to face very difficult trading conditions, with considerable uncertainty over the likely timeframe of the recovery,” Walsh said on a conference call. “We continue to work towards a permanent structural change to our employee cost base, which is essential to our short term survival and long term viability.”

Passenger traffic fell 3.2 percent, led by the slump in premium travel, British Airways said in a statement. The load factor, or proportion of seats filled, slid 0.1 percentage points to 77.6 percent. At Air France, traffic dropped 5.8 percent and the load factor slipped 0.9 points to 79.4 percent.

Industry Loss

Airlines may lose $9 billion this year and sales may drop 15 percent, according to the International Air Transport Association, a forecast that Walsh has called “optimistic.”

British Airways has been mired in talks with unions as it seeks to push through job and pay cuts with its ground staff and cabin crew. Negotiations with the Unite union, which represents 14,000 flight attendants, ended July 23 without agreement and the two sides are currently in a 14-day “cooling off period.”

The airline has already agreed terms with pilots to cut 78 jobs, reduce pay by 2.6 percent, boost working hours and pare benefits. Walsh has also reached an accord with engineers.

BA sold 350 million pounds of convertible bonds July 17 and reached an agreement with trustees of its pension plan to release as much as $540 million in bank guarantees.

Walsh is also seeking to drive consolidation within the industry. The carrier is in talks with Iberia Lineas Aereas de Espana SA about an all-share merger to create an airline with bases in London and Madrid, and is seeking antitrust immunity for a tie-up with AMR Corp.’s American Airlines that would cement its dominance on lucrative North Atlantic routes.

The merger talks with Iberia, announced last July, have been delayed by the Spanish carrier’s concern about BA’s pension deficit. The shortfall probably increased by at least 1.2 billion pounds in the year ended March 31, Chairman Martin Broughton told shareholders on July 14.

To contact the reporter on this story: Steve Rothwell in London at srothwell@bloomberg.net

Last Updated: July 31, 2009 12:07 EDT