Cost increases and flat cargo traffic are expected to cut airline profits in half in 2012, from $6.9 billion in 2011 to $3.5 billion in 2012. Profit margin is expected to fall from 1.2% this year to 0.6% in 2012.

The International Air Transport Association (IATA) released this new forecast this morning, and that’s not even the worst news according to the group’s CEO:

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 Eurozone sovereign debt crisis. Such an outcome could lead to losses of over $8 billion—the largest since the 2008 financial crisis.

There is some slightly positive news for US carriers like Delta Air Lines Inc. (NYSE: DAL), United Continental Holdings Inc. (NYSE: UAL), Southwest Airlines Co. (NYSE: LUV), and US Airways Group, Inc. (NYSE: LCC). North American carriers are expected to generate about $1.7 billion in profits during 2012 primarily due to less capacity growth which will help keep profits up.

But that isn’t enough to keep the global industry on a positive track:

Even if government intervention averts a banking crisis it is unlikely that Europe will avoid a brief recession. Business and consumer confidence has already fallen too far. Global GDP growth forecasts for 2012 have been revised downwards to 2.1%. Historically the airline industry has seen profit turn into loss whenever global GDP growth falls below 2%. This is driving the downgrade in the 2012 outlook.

The IATA expects European-based airlines to lose $600 million next year, mainly due to economic weakness in their home countries and higher passenger taxes. Asia-Pacific carriers, including China, are expected to post a profit of $2.1 billion, down from an estimated $3.3 billion profit this year.

The 2011 profit forecasts for Middle Eastern and Latin American fell by $400 million each, to $400 million and $200 million, respectively. African carriers are still expected to break even in 2011. The 2012 forecast for these three regions have all been lowered: Middle Eastern carriers are now expected to post profits of $300 million, down from $700 million; Latin American carriers are expected to post 2012 profits of $100 million, down from $400 million; and African carriers are still expected to lose $100 million.

A bit of hope does exist for fuel prices to be no higher in 2012 than they are this year, and even for prices to fall if the Eurozone debt crisis doesn’t get fixed. Of course, if that fix doesn’t happen the airlines have bigger problems than the price of fuel.

Paul Ausick

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