British Airways owner International Airline Group (IAG) has cut its annual capacity outlook after quarterly profits were hit by soaring fuel costs and travel demand being suppressed amid the war in the Middle East.

And the group, which also owns Iberia and ​Aer Lingus, suggested that holidaymakers have turned to budget rivals as prices have soared in recent months.

IAG said its capacity would remain flat in 2026 compared to 2025, despite having plans earlier this year to grow this by around 3 per cent.

Consumers have been less keen to book holidays near the Middle East, including Cyprus and Turkey.

IAG chief executive Luis Gallego, said: ‘Europe is the most competitive region. We’re seeing elevated capacity growth, in particular where there are ultra-low-cost carriers.’

In Europe, budget airlines putting on more flights have ‘limited our ability to recover the fuel cost increase through pricing,’ IAG said.

Profits slumped 35 per cent to £626m in the three months to 30 June, from £940million a year earlier, after a sharp increase in fuel costs and emissions charges. Sales rose just 0.2 per cent to £7.6billion.

IAG reiterated plans to recoup about 60 per cent of its higher fuel bill through more expensive ticket prices and cost-cutting measures.

It expects its long-haul markets to ‘remain positive’ while short-haul trips will be ‘competitive.’ Around 57 per cent of its seats have been booked for the second half of the year.

The update came after low-cost rival Ryanair said last week it had been forced to slash summer ticket prices due to weaker customer demand, harming profits.