LONDON (Bloomberg) — British Airways Plc, Europe's third-largest airline, was downgraded to "neutral" from "buy" at Merrill Lynch after the bank cut its profit estimate for the carrier, citing a weaker economy and higher fuel prices.

Merrill analyst Samantha Gleave lowered her estimate for earnings before interest and tax at the London-based carrier by 4.7 percent for the third quarter ended December 31 and by 24 percent for the same period in the coming fiscal year.

"In the light of the more negative backdrop for airlines, we want to reduce long exposure to the sector," Gleave said in a note to investors. "We acknowledge BA's valuation is at an historic low, but believe risk in the sector is higher."

Meanwhile, Caja Madrid, the Spanish lender which owns 22.9 percent of Iberia Lineas Aereas de Espana SA, said it has held talks with British Airways over a possible "stable alliance" for the Spanish airline. Chairman Miguel Blesa told reporters in Madrid yesterday that the savings bank, Spain's second-biggest, wants to build an alliance with London-based BA in Iberia, a spokeswoman for the lender said in a phone interview.