If the mood was not exactly jubilant in Cape Town, there was certainly a feeling that for all the economic challenges thrown their way, airlines are faring pretty well.

IATA's latest outlook raised its forecast from March by another $2 billion to $12.7 billion. This marks the fourth consecutive positive revision in its quarterly forecasts.

While director general Tony Tyler reminded these improvements would still only take its profits per passenger from the price of a coffee to almost that of a sandwich - $2.50 to $4 - it is by the airline industry's poor returns track record, a relatively positive results. A $12.7 billion surplus would mark only the third time collective profits have topped $10 billion in the last 15 years.

Profits IATA 

Some easing in conditions has helped. A further fall in the cost of oil - the barrel price of Brent Crude oil is now expected to average $108 for the year rather than the near $112 of 2012n - is easing its biggest costs pressure.

"We are looking at some decline," says IATA chief economist Brian Pearce. "Some of the factors behind that are we are seeing increasing supply from North America, while economic growth is not as strong, so there is some softness."

Yet this is far from the benign fuel price level of the past, while economic growth - historically the key driver of airline financial performance - remains sluggish.

Pearce notes airlines have been backed on the financial markets - their share performance has been outperforming the equity market - and increased business confidence evident in IATA's latest survey of airlines CFOs. "That's pretty interesting because if you look at the general economic conditions, it still looks pretty difficult," he says.

At the heart of the more optimistic outlook is growing industry confidence that airlines are transforming their business in to deal with those new realities. Airlines globally have managed capacity, amid high aircraft delivery levels, well enough to ensure their aircraft have never been fuller. IATA estimates load factors will top 80% for the first time this year at 80.3% as traffic growth of 5.3% will outpace the extra 4.3% capacity added to the market this year.

Executives at US carriers - now seen as almost the most profitable after IATA lifted its profits forecast for the region by another $800 million to $4.4 billion - have encouraged many by putting a renewed focus on returns. IAG chief Willie Walsh noted these comments in the airline group's recent results, going on to describe capacity discipline on the transatlantic market as "one of the most positive features we've seen in the last 24 months".

Tyler also highlights the increased role of ancillary revenues - which have moved from fractional level of total revenue in 2007 to around 5% today. "We expect that figure to grow significantly again this year," says Tyler. While a portion of this reflects revenue moved out of the ticket price through unbundling, it also represents where airlines are innnovating and creating new revenue streams.

IATA now sees revenues rising to $711 billion in 2013 as passenger numbers will top 3 billion for the first time. "Business travel has been one of the success stories and I think that reflects the emerging markets success in expanding trade," says Pearce.

Neither does Pearce see much sign of the impact on travel demand from the slowing economic growth in China - still at a level eyed enviously from Europe but no longer double-digit. " Clearly the economics matter, but frankly we have not seen any sign of that [weakening demand] in the domestic travel market. Consumers still seem to want to be travelling more," he says.

Where Asia carriers have been affected is by cargo, where its airlines are more exposed than most. IATA was relatively less optimistic about Asia-Pacific - lifting its forecast only $400 million to $4.6 billion. While North American carriers are expected to make the same money this year as they did in the record 2010, Asian carriers will make less than half the $11 billion profit they generated that year.

Crucially air cargo, despite a couple of false dawns, has failed to recover. Association of Asia Pacific Airlines director general Andrew Herdman says the cargo market has been stagnant for nearly three years and that a recovery expected last year did not materialise. "2011-12 has been moribund and that has taken everyone by surprise," he says.

Pearce notes there are renewed signs of increased business confidence, but it is too early to say if that will prove sustainable or another false dawn.

"We think this year will be a better year, but not quite as good as 2010," concludes Pearce. "Given the last 15 years, that historically is not a bad performance." But as Tyler reminds: "It is still a very tough business".

Source: Air Transport Intelligence news