By Rhys Jones

LONDON (Reuters) - British Airways <BAY.L> signaled business is stabilizing, eclipsing news of a worse than expected first half loss and a prediction that revenue would slump by 1 billion pounds ($1.7 billion) this year.

Shares in the company jumped as much as 8 percent, making it the biggest gainer on the FTSE 100 index <.FTSE>, as the company also said revenue from business travelers was back at pre-credit crunch levels by one industry measure.

"The market was fearing something worse but BA's tone was more optimistic than it has been -- it can see light at the end of the tunnel now," said Evolution analyst Nick Cunningham.

"As we move into winter, it's like BA can see the spring."

BA, whose alliance with American Airlines <AMR.N> and Spain's Iberia <IBLA.MC> is being scrutinized by European and U.S. competition watchdogs, on Friday reported a pretax loss for the six months to end-September of 292 million pounds ($482.4 million), while revenues fell 13.7 percent to 4.1 billion.

The airline, which has reduced operating costs by 8.7 percent, cutting free meals on some flights, said it would slash more costs, with another 1,200 staff losing their jobs next year taking the total number of job losses to 4,900.

"Our revenues are likely to be about 1 billion pounds lower this year so we're determined to reduce costs further to ensure we return to acceptable levels of profitability," Chief Executive Willie Walsh told reporters on a conference call, adding that BA was "riding along the bottom" of the downturn.

Shares in BA, which have risen 27 percent in the last quarter, were 5.9 percent higher at 197.2 pence by 1439 GMT, valuing the group at around 2.5 billion pounds.

Shares in peers Lufthansa <LHAG.DE> and Air France-KLM <AIRF.PA>, which have also cut their bloated cost bases in response to the recession, both rose.

BA reported better traffic data, with all-important premium, or business class, traffic down 1.4 percent in October year-on-year, a vast improvement on September's 7.9 decline.

It also said premium yields -- the revenue it makes on each business class passenger for every mile traveled -- had returned to pre-credit crunch levels over the last three months.

The airline's loss -- impacted by lower interest rates, a higher pension burden and restructuring costs -- compares with a first-half pretax profit of 52 million last year and expectations for a loss of between 235 million and 255 million in a Reuters poll of six analysts.

LESS PESSIMISTIC TONE

BA said passenger revenue fell 13.6 percent, on capacity 3 percent lower, while yields were down 12.2 percent.

However, it said volumes and yields had "started to stabilize," with analysts predicting the worst could be over.

"The tone is a little less pessimistic than before. That is consistent with the view that BA has reached the bottom of the downward cycle," said Astaire analyst Douglas McNeill. Continued...