Amid all the economic gloom and headlines IATA provided something of a surprise with its latest industry forecast, predicting airline profits in 2011 will not be as hard hit as it feared three months ago.

But the sting is in the tail. While forecasting collective industry profits of $6.9 billion for 2011, a brighter picture than the $4 billion profit it was forecasting three months ago, its first outlook for next year is for things to get worse.

Key to the brighter prognosis for 2011 is passenger volumes. IATA left its revenue, yield and oil price projections for the year relatively unchanged, while it sees cargo growth stagnating.

But it sees passenger traffic for 2011 growing 5.9% - compared to the 4.4% it originally envisaged for this year - reflecting stronger volumes than expected over the first half.

New IATA director general Tony Tyler, delivering the industry body's industry forecast for the first time, noted the air transport market held up well. "Even in these uncertain economic and political times, and with all the extremes shocks we have had, people are still flying," he said.

The stronger than expected first half traffic volumes mean IATA sees an improved outlook on its June forecast for all regions, but with a notably improved outlook for European and Middle East carriers.

"The weak euro is helping those European airlines on volumes," noted Tyler, providing the biggest single contribution ($900 million) to the improved forecast for 2011. "But we don't see it as sustainable due to the particular economic situation on the continent."

Indeed a glimpse beyond 2011 suggests this is less Europe boldly defying economic indicators and more a stay of execution. It sees Europe's airlines slipping from a relatively robust $1.4 billion profit in 2011 to just $300 million in 2012, making it the second worst performing region.

But IATA sees all regions' profit momentum slipping back in 2012, as net industry profits slip to $4.9 billion. "We are moving into 2012 with a period of weakness," said chief economist Brian Pearce. "The best way to characterise it is continued weak profits into 2012."

"The main area of risk [for the forecast] is coming out of Europe," he added. "Risk to our 2012 outlook comes on both [positive and negative] sides. It is an unusually, uncertain outlook generated by the debt crisis in Europe."

And Tyler warns that with global economic growth projected to slip to 2.4% in 2012 it puts GDP growth dangerously near the 2% level where airlines have historically lost money.

"We will be perilously close to that level at least through 2012. The industry is brittle. Any shock has the potential to put us in the red," Tyler said.

High oil prices will also remain a drain on airlines. While IATA anticipates a slight relenting in the oil barrel price from an average of $110 this year to around $100, it still notes the lagging effect of hedging means the industry fuel bill is set top $200 billion for the first time next year.

"We are expecting airlines to tackle their non-fuel costs further, which will dampen the effects the higher the cost of the fuel bill," said Pearce. "[But] the main story for 2012 is the softness of revenues because of the difficulties in the wider economy."

Source: Air Transport Intelligence news