IATA, which represents about 80 percent of global carriers, now expects the $630 billion airline industry to make a net profit of $4.1 billion this year, up from an earlier forecast of $3 billion but still less than half the $8.4 billion achieved in 2011.

IATA also said in its first forecast for 2013 that industry profits will rise further next year to $7.5 billion, helped by passenger traffic expansion of 4.5 percent and cargo expansion of 2.4 percent as global economic growth quickens to 2.5 percent from an expected 2.1 percent this year.

Profit margins will remain razor-thin at 1.1 percent in 2013 versus an expected 0.6 percent in 2012, the association added.

"The outlook improvement is due to airlines performing better in a difficult environment," Tony Tyler, IATA's director general and CEO said in a statement.

"The European sovereign debt crisis lingers on. China continues to moderate its growth and the impact of recent quantitative easing in Japan and the U.S. will take time to yield growth," he added.

The Geneva-based body said aircraft flew on average 79.3 percent full in the first eight months of this year with passenger demand increasing by 1.4 percentage points ahead of capacity.

"The fact that there are fewer spare seats on flights than would be expected at this point of the business cycle, when lower demand and rising aircraft deliveries tend to lower the proportion of seats sold, suggests airlines have resisted the temptation to win back revenue by increasing capacity," the association said.

ASIA, MIDDLE EAST

IATA's improved outlook is a boost for Asian airlines that have been plagued by weak earnings. In August, the world's largest air freight carrier, Cathay Pacific Airways, posted its worst first-half loss since 2003, hurt by high fuel costs, weak cargo demand and fewer premium passengers.

"Despite a slowdown in the Chinese economy, Chinese domestic demand is still growing at nearly 10 percent," Tyler said. "The demand for regional and long-haul travel has held up better than expected in the face of economic uncertainty."

Australia's Qantas Airways also posted a full-year net loss of A$244 million for the first time in 17 years and cancelled orders for 35 Boeing Dreamliner jets to cut costs.

Although Singapore Airlines Ltd, the world's No.2 carrier by market value, posted a net profit of S$78 million for the quarter ended June, it warned that profits at its cargo and passenger units remain under pressure.

North American carriers are expected to boost profits to $1.9 billion this year from $1.3 billion in 2011, after extensive restructuring. Asian profits of $2.3 billion continue to drive most of the industry's growth although they will be down from last year's $5.3 billion.

Europe, mired in an ongoing debt crisis, is expected to suffer wider-than-previously-expected losses of $1.2 billion.

Middle Eastern carriers gained market share during the first eight months of the year, with passenger traffic rising 17.1 percent and cargo demand increasing 14 percent from a year ago.

"The region's carriers continue to expand their long-haul market share with connections through their expanding hubs, IATA said.

Emirates Airline and other Middle Eastern carriers had a 11.5 percent share of international passenger traffic in August this year, up from 4.8 percent in 2002, according to IATA data.

The share could rise further as Emirates last month signed a deal where Australia's Qantas Airways agreed to use Dubai instead of Singapore as its hub for European flights from March 2013. Under the deal, Qantas will also end a 17-year old alliance with British Airways.

Globally, IATA raised its forecast for passenger demand despite weak confidence in Europe, but pushed its forecast for cargo into the red. The economically sensitive sector is expected to see a 0.4 percent contraction in 2012 instead of 0.3 percent growth as previously forecast.

About 40 percent by value of internationally shipped goods go by air and cargo demand is seen as a barometer for world trade and the health of the economy.

IATA represents some 240 airlines that in turn account for 84 percent of global air traffic.

For more information, click on: www.iata.org (Additional reporting by Tim Hepher in PARIS; Editing by Matt Driskill)

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