KEY POINTS:
Soaring fuel prices and fallout from the global credit crunch will hit airline profits around the world next year, taking the shine off figures showing they are in the black for the first time since 2000.
The International Air Transport Association has revised its profit forecast made in August down from US$7.8 billion ($9.92 billion) to US$5 billion next year.
The outlook is unchanged for this year at US$5.6 billion.
IATA director-general Giovanni Bisignani said higher fuel prices of US$73 a barrel for the full year were offset by strong 5.9 per cent passenger traffic growth and and even stronger revenue growth of 8.4 per cent.
"The challenges get tougher in 2008.
"A favourable economic environment and effective efficiency measures helped mitigate the impact of high fuel prices and underpinned profitability improvements. With the credit crunch, that is changing."
IATA's revised profit forecast is based on an average oil price forecast of US$78 a barrel for next year, well above the US$67 forecast in September.
It now expects the industry's total fuel bill for next year to reach US$149 billion, up US$14 billion from last year and representing 30 per cent of total operating costs - up from slightly more than 10 per cent in 1997.
Air New Zealand, which doubled its profit to $214 million for the past financial year, is well positioned to weather tougher times, says Rob Mercer of Forsyth Barr.
Incumbent airlines with strong balance sheets, dominance on their key international routes and good yields from the profitable business class sections of planes would continue to do well, he said.
Air NZ is also insulated from the worst peaks of aviation fuel prices through hedging for the first half of next year.
Although fuel prices are forecast to fall next year, Mercer said their impact could put a dent in "what could have been an extraordinarily good year" for all airlines.
IATA said North American airlines were likely to see the biggest drop in profits, down 19 per cent next year to $2.2 billion from a forecast $2.7 billion in 2007.
The United States domestic market now has about 30 per cent of global air traffic and with a large number of older fuel-inefficient aircraft is going to be hit harder by higher fuel costs.
US airline shares fell sharply immediately after the IATA announcement.
The Amex airline index fell by 2.67 per cent with US Airways down 9.7 per cent, Northwest Airlines down 7.7 and United Airlines parent UAL Corp's down 6.
IATA economist Brian Pearce said the industry had coped with increasing fuel bills because economic growth was strong, boosting revenues, and it was possible to push load factors up significantly.
"Now the support of strong growth is falling away, without the relief of significantly lower fuel prices - we seem likely to suffer the worst of both worlds."
Air traffic markets were still heavily weighted towards the US, while demand for oil is shifting towards Asia.
China and the rest of Asia now make up 60 per cent of the incremental demand for oil.
DOWN AND UP
Since 2001:
* Non-fuel unit costs dropped 16 per cent.
* Labour productivity is up 64 per cent.
* Sales and marketing unit costs decreased 25 per cent.
* But fuel has risen to US$135 billion.
