IATA has raised its industry profit forecast for this year and next on the back of improving market conditions.

The association now expects the industry to generate a net profit of $5 billion this year, a more than 30% improvement over the $3.8 billion profit predicted in April. IATA, which expects oil prices will average $63 per barrel this year and $60 next year, also has revised upward its profit forecast for 2008 to $9.6 billion from $7.6 billion.

IATA chief economist Brian Pearce says the upward adjustment reflects stronger than expected passenger demand during the first quarter of this year, in particular business demand in Asia and Europe. The rosy forecast for 2007 and 2008 is a big change from last year, when Pearce feared that profits - although tiny - were already peaking.

"We're positive we'll continue to see improvement into next year," Pearce now says. But he is quick to add that the projected 4% operating margin for 2008 is still relatively low: "In 2008 we're still not at the peak of the last cycle."

IATA director general Giovanni Bisignani describes the $5 billion as "peanuts" compared with the peak of the last cycle and warns that airline balance sheets are still not healthy enough to resist a big shock. "The challenge for us is to turn peanuts into sustainable profits. Some economists predict another five years of strong growth, but nobody can predict shocks, and even a small one could have a big impact," he says.

"We need $40 billion [in annual profits] just to cover the cost of capital. The industry is moving in the right direction, but with $200 billion of debt, the financial hole is deep."

Bisignani is concerned unions may use the higher profits to demand wage increases and improved working conditions. "Unions must understand that the happy days of the free lunch are gone forever," he says. "The economic boom could be a boomerang. The increase in plane orders is making efficient aircraft more expensive and harder to get. More importantly labour pressure on wages could kill productivity gains."

Source: Airline Business