By Daisuke Wakabayashi TOKYO, May 24 (Reuters) - All Nippon Airways Co Ltd (ANA), Japan's second-largest carrier, said on Friday it fell into the red in 2001/02, hit by weak demand for overseas flights, but it vowed a return to profit despite growing competition on domestic routes. ANA posted a net loss of 9.46 billion yen ($75.68 million) for the year ended March 31, its fourth group loss in five years, after the September 11 attacks in the U.S. triggered a sharp decline in the number of people travelling overseas. For the current year, ANA said it expected to post a group net profit of two billion yen, with sales rising to 1.28 trillion yen from 1.20 trillion in 2001/02. Last year's result was worse than the consensus estimate from research firm Multex, which was for a group net loss of 8.5 billion yen, and the forecast for the current year came in below the Multex forecast of a profit of 7.7 billion yen in 2002/03. ANA holds a market share of almost 50 percent on domestic routes, leaving it less exposed than Japan's largest carrier Japan Airlines Co Ltd (JAL) (9201) to the September 11 attacks, which prompted many Japanese travellers to cancel overseas trips. ANA said the number of passengers on its international flights fell 19.7 percent in 2001/02 from a year earlier, while customers on domestic flights edged 0.8 percent higher last year. "On international flights, we see a recovery in passenger numbers to pre-September 11 levels this year," Yasushi Morohashi, executive vice president at ANA, told a news conference. The airline said it expects revenues from its international flights to rise almost 20 percent in 2002/03, while revenues from its domestic flights are seen rising a more modest 2.4 percent. JAL said earlier this month it expected a recovery in overseas flights after the summer and defied analysts' expectations of a loss, predicting a return to profit this year. Indicative of the upbeat outlook, ANA expects an operating profit of 41 billion yen in 2002/03, up 78.5 percent from 2001/02. Another bright spot for ANA is an expected boost in flights to Asia, spurred by increased demand for flights to China and the opening of a second runway at Tokyo Narita Airport. TOUGH TALK ON JAL-JAS MERGER However, the good cheer from ANA about the relatively strong showing of its domestic routes may be short-lived, as its stronghold looks threatened by the planned merger of JAL and Japan Air System Co Ltd (JAS) (9203) under a holding company in October. The JAL-JAS merger would create the world's sixth-largest airline by passenger volume. Full business integration is expected by the spring of 2004. The original merger plans were deemed anti-competitive by Japan's Fair Trade Commission, because it gave the merged entity an unfair advantage in the domestic market. A revised plan was approved in April. That included the return of nine landing slots at Tokyo's Haneda Airport to the Transport Ministry in October, a 10 percent fare reduction on all domestic flights and a price freeze for three years. The merged group believes it will lose 25 billion yen in revenues from the fare reduction, but that will be offset by annual cost savings of 73 billion yen. "If they say they will lose 25 billion yen in revenue, we want to take back at least 20 billion," said ANA's Morohashi. "We will not lose to the merged company." ANA said it would not cut fares across the board, but would be more strategic. However, analysts are sceptical. "The airline industry is plagued by excess competition...ANA will probably suffer when JAL reduces prices by 10 percent after the merger with JAS," said Hiroshi Nishida, General Manager at Mitsubishi Trust Asset Management Co Ltd. ANA also announced it would seek shareholder permission to shift 82.6 billion yen to retained earnings from capital reserves. Shares in ANA closed up 2.44 percent at 378 yen before the earnings announcement, compared with a 0.03 percent fall in the Nikkei 225 average (N225). ($1=125) (Additional reporting by David McMahon) ©2002 Reuters Limited.