* Q2 fuel costs and emissions charges jump nearly 23%

* IAG says it is around 57% booked for the second half

* IAG now expects annual capacity to be flat

* Ryanair and easyJet have also flagged conflict-driven

pressure

(Adds details in paragraphs 4 and 6, background in 5)

July 31 (Reuters) - British Airways owner IAG

reported a 16% drop in second-quarter profit on Friday, weighed

down by soaring fuel costs and weak travel demand linked to the

Middle East conflict, and said it now expects capacity to be

flat this year.

IAG, which also owns Iberia and Aer Lingus, said its fuel

costs for the year would range between €8.3 billion and €8.6

billion, slightly lower than the roughly €9 billion ($10.36

billion) forecast in May.

The quarterly results reflect the pressure and uncertainty

highlighted by fellow carriers Ryanair and easyJet

this month, as a prolonged and escalating war raises

costs and weakens travel demand.

All of IAG's airlines saw an adverse impact from higher fuel

prices from March onwards, as fuel costs and emissions charges

jumped nearly 23% in the second quarter to €2.22 billion, IAG

said.

IAG has long relied on strong demand on its core

transatlantic routes, but the war is now undermining that key

source of earnings. The airline was forced to warn on profit and

capacity in May.

It said it was around 57% booked for the second half of the

year, with booked revenue in line with a year ago. It continues

to expect to offset around 60% of its higher fuel bill through

higher ticket pricing and cost initiatives.

The carrier posted an operating profit before exceptional

items of €1.41 billion for the quarter on Friday, below the

€1.68 billion reported a year earlier, but slightly ahead of the

€1.37 billion forecast by analysts in a company-compiled poll.

($1 = 0.8692 euros)