The airline industry has cut its forecast for profits next year by a third as soaring fuel costs and the credit crunch begin to take their toll.

The International Air Transport Association (IATA) predicted yesterday that the global aviation business would make profits of $5 billion (£2.4 billion) in 2008, compared with a previous forecast of $7.8 billion. The greatest burden on airlines next year will be fuel prices, with the spike in charges set to add $14 billion to the industry fuel bill, to $149 billion, based on an average price of $78 per barrel.

The impact of the credit crunch is also expected to lead to slower revenue and traffic growth. The delivery of new, bigger aircraft will make the problem worse, with a greater numbers seat competing for a smaller number of passengers.

Giovanni Bisignani, the IATA director-general, said: “The challenges get tougher in 2008. A favourable economic environment and effective efficiency measures helped to mitigate the impact of high fuel prices and underpinned profitability improvements. With the credit crunch, that is changing. The peak of the business cycle is over and we are still $190 billion in debt. So we could be heading for a downturn with little cash in the bank to cushion the fall.”

The predicted downturn would come after the sector’s first profitable year since the terrorist attacks of September 11, 2001. The global industry is set to make profits of $5.6 billion this year.

North American carriers are expected to see the largest fall in profitability, partly because they have the oldest and, therefore, least fuel-efficient aircraft. The region is also at the centre of the credit crisis, with implications for business travel.

British Airways poured cold water on the IATA predictions and their potential impact on its lucrative transatlantic market, saying that it was experiencing no slowdown in traffic in the final months of the year and was confident for the year ahead. November traffic figures released by BA last week show that long-haul markets are strong, but there is some indication that business-class passengers are choosing to travel in economy for short-haul trips.

European carriers have been particularly concerned about the impact of the credit crunch. Premium travellers, usually business customers, account for 25 per cent of traffic for the top five European airlines on transatlantic flights, compared with 15 per cent for the leading American carriers. MaxJet, the Stansted-based business class-only airline, which floated on the AIM market in June, suspended its shares last Friday because of financial difficulties thought to have been caused by a combination of a fierce price war and soaring fuel costs.

The IATA has predicted that European and Asian carriers would experience only minor falls in profitability, of $100 million each to $2 billion and $600 million respectively.

Despite the problems, profitability of the Latin American air industry will improve by $100 million, allowing the region to break even in 2008, largely as a result of industry restructuring.

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