Spain's Iberia posted a narrower-than-expected first-half operating loss on Friday as improving business travel and air cargo demand countered the negative impact of a volcanic ash cloud in April.

Iberia, which plans to merge with British Airways before the end of the year, said it lost 72 million euros (59 million pounds) in the six months to end-June, beating analyst forecasts for an operating loss of 88 million.

Aside from the expected recovery in traffic demand, what really drove these positive results was the significant improvement in yields, said Elena Fernandez, analyst at Spanish brokerage Ahorro Corporacion.

The flag carrier's yields -- the revenue made on each passenger for every mile travelled -- rose 7.8 percent, driven by rises in long-haul traffic, particularly on Latin America routes.

Iberia estimated about 20 million euros of losses from disruption to air travel from a volcanic ash cloud that drifted across Europe from Iceland in April, but analysts said the real impact may not have been all bad.

They were also able to sell more expensive tickets during that time, Fernandez said.

Iberia posted profits at both the net and operating levels in the second quarter, breaking six consecutive quarters of losses. Management did not provide guidance for the year.

Merger partner BA as well as European rivals Air France and Lufthansa have said they expect to break even at the operating level in 2010.

Shares in Iberia, which have gained 35 percent this year on hopes for a successful tie-up with BA, lost 0.4 percent to 2.56 euros by 12:30 p.m. British time, giving up earlier gains. Dealers attributed the losses to profit-taking due to a lack of fresh news flow.

The merger with BA is still on track, Iberia Chairman Antonio Vazquez told analysts on a conference call, with the board due to decide by September 30 whether to approve BA's recovery plan for a 3.7 billion pound pension deficit.

I can't anticipate what their decision will be...but we expect to meet the end-September deadline, Vazquez said.

The two airlines received EU clearance in July for their $8 billion merger to create the world's third-largest airline, and analysts see Iberia's decision on BA's deficit as potentially the final obstacle to the deal.

Iberia's revenue rose 2.8 percent to 2.23 billion euros in the six-month period, while net losses narrowed to 21 million as the airline continued to implement strict cost controls.

A Reuters poll of analysts forecast first-half revenue of 2.20 billion euros and a net loss of 41 million.

(Editing by Mark Potter and Michael Shields)

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