* Q1 operating loss 102 lmln eur vs forecast 125.3 mln loss
* Estimates 5.2 billion euros fuel bill in 2011
* Expects up to 100 million eur hit from Japan, North Africa
* Shares up 3.4 percent
(Adds comments on capacity, M&A, updates shares)
By Tracy Rucinski
MADRID, May 6 (Reuters) - International Airlines Group , formed by the merger of BA and Iberia, said it expected "significant growth" in operating profit this year as a continuing recovery in travel helps unit revenue and costs.
Europe's second biggest airline group by value however warned on Friday that rising oil prices still posed a challenge for the year ahead.
"The trends we've been seeing, with good premiums and yields, particularly in long-haul, will continue through the summer," IAG's chief executive Willie Walsh said after IAG posted a smaller-than-expected operating loss for the first quarter
But he added that "fuel costs remain the big challenge facing the industry."
International oil prices hit a 2-1/2 year high last month as unrest spread in North Africa and the Middle East, spurring concerns over supply. But they then fell below $100 per barrel after suffering the second biggest fall on record on Thursday.
Fuel costs account for about 30 percent of overall expenses for IAG, which tacked 100 million euros onto its estimated fuel bill for 2011, taking the expected total to 5.2 billion euros.
The fuel bill rose 31 percent in the first quarter to 1.13 billion euros.
IAG, which finalised its merger last November, also said it expected the recent events in Japan and North Africa to have a negative impact on results of between 90 million and 100 million euros.
"What's most worrying is the fuel bill. It's going to be very difficult to pass on the rise in ticket prices considering tough competition in the sector," Elena Fernandez, analyst for Spanish brokerage Ahorro Corporacion said.
British Airways announced a third fuel surcharge hike on long-haul flights last month. The high price of oil has contributed to a squeeze on European consumers already struggling with rising inflation and wage freezes.
SHORT-HAUL BITES
While long-haul business remained stable with continued strength in premium travel, the merged company said short-haul remained highly competitive, underscoring the challenge larger carriers continue to face from the surge of low-cost rivals.
Iberia has been studying the creation of a new, no-frills carrier to better compete in Spain and Europe but unions have been reluctant to sign off on the plan.
More consolidation, also considered a way for airlines to better compete in the industry, is also on hold, Walsh said.
Separately, he said IAG had the flexibility to adjust capacity if needed, although so far he had not seen any impact on premium or economy travel from higher fuel surcharges. Passenger traffic for IAG rose 24.9 percent in April, a reflection of the halt in air travel in the same month last year due to a volcanic ash cloud from Iceland. Passenger load factor -- a measure of how well a carrier is filling its seats -- rose 1.7 percentage points to 79.7 percent.
OIL STILL A THREAT
Oil prices slid further on Friday driven by worries over global growth, but analysts said fuel costs would remain a concern for global airlines, which have also taken a hit from turmoil in North Africa and the Middle East as well as from the earthquake and nuclear crisis in Japan.
Even before the earthquake struck Japan in March, airlines body IATA had forecast global airline net profits would halve this year as rising costs offset increased demand.
This week it said it expected air travel markets to remain depressed in the second quarter after growth in international air passenger traffic slowed in March due to disrupted traffic flows to and from Japan.
IAG said its first quarter operating loss narrowed to 102 million euros ($143 million), beating a Reuters forecast for a 125.3 million euro loss. Revenues rose 15.4 percent to 3.64 billion euros, driven by growing first and business class travel.
Year-ago comparisons were calculated by IAG since the two airlines sealed their merger in November.
Rival Lufthansa posted a first-quarter operating loss of 227 million euros on Wednesday but confirmed its 2011 outlook. Air France-KLM reports fiscal-year earnings on May 19.
IAG shares in London rose 3.4 percent to 254 pence by 1320 GMT, supported by the sharp drop in oil price and valuing the company at about 4.7 billion pounds.
The Madrid-listed IAG shares were up 4 percent to 2.88 euros, while Lufthansa and Air France also gained about 4 percent thanks to falling oil prices. (Reporting by Tracy Rucinski and Robert Hetz; Editing by Mike Nesbit, Hans Peters and Jane Merriman) ($1=.7158 euros)