British Airways posted a surprise third-quarter operating profit, helped by heavy cost cutting, but said it was still in a worse position than last year, despite attempts to adapt to the realities of global recession.

The British flag-carrier on Friday reported an operating profit of 25 million pounds ($39 million) in the three months to the end of December, well ahead of analyst estimates that it would post a loss of loss between 90 and 100 million pounds.

The result was a pleasant surprise and is a remarkable turning of the corner, said Evolution analyst Nick Cunningham.

Employee and fuel costs fell 10.2 percent and 22 percent, respectively, in the third quarter, while engineering and selling costs also dropped significantly, the airline said.

These results highlight the impact of permanent changes across the company on our costs, BA Chief Executive Willie Walsh said.

Those changes, combined with capacity reductions and external spending cuts, mean operating costs are down by 10.5 percent and show that we've adapted quickly to the new business realities created by the global recession.

Shares in BA, which jumped 2.3 percent in early trade were 1.0 percent lower at 218.9 pence by 5:48 a.m. EST, valuing the airline at around 2.5 billion pounds.

BA said the year-on-year improvement in fourth quarter operating profit is likely to be similar to the third-quarter so 76 million pounds better year-on-year ... but the focus remains on costs, said Societe Generale analyst Jonathan Wober.

Rival Air France recently said business was stabilizing but the chief financial officer of Deutsche Lufthansa last month said some analyst estimates for 2010 were too high.

However, Finnish national carrier Finnair on Friday reported wider fourth-quarter losses and said it expected to make a loss in the first quarter this year.

BA's operating loss came in at 86 million pounds for the first nine months of the year, sharply down from a profit of 89 million pounds it made in the same period a year ago, while revenues fell 12.9 percent to 6.14 billion pounds.

BA is expected to report a record full-year pretax loss of 627.76 million pounds, according to the average from a Thomson Reuters I/B/E/S poll of 17 analysts.

TOUGH 2010

The International Air Transport Association (IATA) last week said the aviation sector would face a tough 2010 making up for the lost demand in 2009 and handling new security demands.

BA said its yields -- the revenue it makes on each passenger for every mile travelled -- fell 8.8 percent in the third quarter, reflecting lower surcharges and cabin class sales.

Yields were 11.9 percent up in the same quarter last year.

Long-haul premium yields have recovered to 2007 levels and show recovery. Yields in non-premium cabins have some way to go before they recover and short-haul yields have not recovered to the extent we have seen elsewhere, said Walsh.

The airline said it carried 7 percent fewer passengers in January year-on-year. The number of its premium, or business class, passengers fell 2.1 percent year-on-year, while non-premium traffic fell 7.9 percent on the same month last year.

Premium is better than overall traffic, which shows business travel is steadily improving, but the domestic recession is still going on and unemployment is high so economy is not back to its best, said Evolution's Cunningham.

The carrier, which said its merger agreement with Spain's Iberia would be finalized by the end of the year, added that it was confident of receiving regulatory approval for its proposed transatlantic tie-up American Airlines and Iberia.

BA's Walsh said the company was working to address its 3.7 billion pounds pension fund deficit and was discussing a range of changes to future pension benefits.

Low-cost rivals easyJet and Ryanair recently raised their profit forecasts and said they were still taking market share from leading flag carriers such as BA and Air France-KLM.

BA is currently in court fighting a union bid to overturn changes made to cabin crews' working arrangements, with a ruling expected later on Friday.

(Editing by Julie Crust and Mike Nesbit)