GENEVA (Reuters) - Airlines worldwide face severe losses next year if Europe's politicians fail to get to grips with the region's debt crisis, the industry's leading trade group warned on Wednesday.
The International Air Transport Association (IATA ) shaved its main forecast for industry profits to $3.5 billion (2.2 billion pounds) for 2012, but said the industry could plunge to an $8.3 billion loss with no region of the world exempt if Europe's debt woes precipitate a new banking crisis.
IATA, whose 240 airlines carry 84 percent of global traffic, had previously forecast industry profits of $4.9 billion in 2012 after estimated profits of $6.9 billion this year. The 2011 figure was unchanged from IATA's previous outlook in September.
"The biggest risk facing airline profitability over the next year is the economic turmoil that would result from a failure of governments to resolve the euro zone sovereign debt crisis," said IATA Director General Tony Tyler.
"Such an outcome could lead to losses of over $8 billion, the largest since the 2008 financial crisis," he added.
So far aviation has been relatively optimistic about its prospects as Europe teeters on the edge of recession, with rising demand in Asia and capacity restraint in North America seen boosting profits and driving talk of a two-speed market.
Few industry leaders have been willing to contemplate a meltdown, with Airbus EAD.PA and Boeing Co (BA.N) cranking up production to record levels to meet demand for fuel-efficient new airplanes.
But IATA said it could not ignore growing economic risks.
"There remains a very significant risk that the sovereign debt crisis in the euro zone could spiral out of control, generating a banking crisis and more widespread economic weakness," it said in a market forecast on Wednesday.
IATA gave a second, worst-case scenario that draws on a risk assessment on the European debt crisis carried out by the Organization for Economic Co-operation and Development.
The exercise takes account of the possibility a full-blown banking crisis marked by deep European recession and with the fallout felt globally. IATA adopted the OECD's downside forecast that the global economy would grow by 0.8 percent next year.
"In this scenario, airlines would see growth in passenger demand grind to a halt and a 4.7 percent contraction in cargo markets," the Geneva-based agency said.
Freight markets are already falling in a sign of declining business confidence and weakening global trade, though passenger business of many airlines is performing better than expected. Freight traffic shrank 5 percent between May and October.
IATA groups most of the world's flag carriers and traditional network airlines such as International Airlines (ICAG.L), Lufthansa LGAG.DE and Air China (0753.HK), but excludes most low-cost carriers which have generated much of the industry's traffic growth. However, its forecasts include estimates for low-cost travel.
Under the central forecast of $3.5 billion global airline profits, regional differences are expected to widen as European carriers slip into a combined loss of $0.6 billion and Asian airlines pull in profits of $2.1 billion helped by China.
North American carriers are relatively buoyant with estimated 2012 profits of $1.7 billion due to cost cuts and capacity restraint but IATA says the bankruptcy filing of American Airlines AMR.N underscores the sector's fragility.
Reporting by Tim Hepher and Robert Evans