"There is a new cautious optimism emerging in the industry. Improved economic prospects in Europe and Asia, combined with an improving situation in the US, will lead to reduced losses in 2006 and strengthened profitability in 2007. While the trend is positive, we are nowhere near sustainability," said Giovanni Bisignani, director-general and chief executive of the association.

The revised forecasts are based on prices of $57 per barrel for Brent crude oil this year and $52 next year.

"Oil remains the single-biggest challenge for airline profitability. Strong demand gives little hope of significantly reduced prices this year. What is disappointing is the response of the oil industry. Instead of expanding refinery capacity, the oil companies plan to return a quarter of a trillion dollars to investors over the next two years. Airlines alone have contributed $14 billion to this windfall profit. It is time that governments stepped in to encourage investment in new refinery capacity along with research into alternative fuel sources," said Bisignani.

Asia-Pacific carriers will post the largest absolute profits in the industry at $2 billion, which is down from last year's $2.9 billion.

North American carriers will cut their losses from $10.8 billion last year to $5.4 billion this year, as a result of a 3-per-cent reduction in domestic capacity from last November to this past January that is giving US airlines increased pricing power. Significant capacity has been redeployed to international markets, resulting in an increase in international operations by US carriers of 8.4 per cent last year. European carriers will follow a similar pattern, with profitability falling to $1.4 billion this year, from $1.8 billion last year.