British Airways' chief executive expects more failures and more mergers in the air industry this year as carriers face the challenges of soaring oil prices and a weak US economy.

The British flag carrier, which reported a 45 percent surge in annual profit last week, has cut costs and introduced surcharges to counter rising fuel prices, but admits that this year will be "challenging."    

"I suspect that many airlines out there that struggled when fuel was less than $100 a barrel are not going to be able to take the required actions and we will see further failures," said Willie Walsh, speaking at an investor presentation in New York on Monday.

With crude oil cresting $127 a barrel, roughly twice its price a year ago, and the US economy dangerously close to a recession, seven airlines have already declared bankruptcy or stopped operating in the past five months.

"Clearly, bankruptcy is an effective form of consolidation, as they (failed airlines) take their capacity out of the market," said Walsh.

Two of the recently failed carriers, Eos Airlines and MAXjet Airways, were in direct competition with British Airways, offering business-class only flights between London and New York, one of its most lucrative markets.

Despite that easing of competition, British Airways said transatlantic business has been declining because of the slowing US economy and weak dollar. It is "inevitable" that the airline will cut its capacity for the usually low-demand winter season, Walsh said, but gave no further details.

Mergers will consolidate the industry further, Walsh said on Monday, which will follow Delta Air Lines Inc's  deal to buy rival Northwest Airlines Corp, announced a month ago.

"The high oil price combined with the economic slowdown may well have made it an imperative for many (airlines) to consider consolidation," he said. "We will see meaningful consolidation, sooner rather than later."

In April, British Airways said it was in talks with US rivals Continental Airlines and AMR Corp's American Airlines, which a source briefed on the matter said was about a cost-saving alliance.

Walsh declined to elaborate on that on Monday, but said the impetus for a deal was coming more from the US side, as looming merger deals force US carriers to rethink their transatlantic alliances.

British Airways said last week that the current quarter would be "particularly difficult", as it grapples with rising fuel, the sinking economy and a delay in moving some flights over to its new Terminal 5 at London's Heathrow airport.

Terminal 5's opening at the end of March descended into chaos as hundreds of flights were canceled, passengers stranded and baggage lost.

Walsh declined to criticize Boeing Co, which has pushed delivery of the first of British Airways' 787 Dreamliners to 2012 at the earliest, long after the original target of August 2010.

"These are large-scale projects, and having gone through T5 -- which is a much smaller scale project -- and witnessed what can go wrong, I suppose I should have sympathy for these guys more than anybody else." - Reuters