Passenger demand for airlines climbed 5.9% in 2011 but an industry group sees darkening skies next year without some major overhauls.

Capacity growth outpaced demand last year, putting downward pressure on load factors, according to the International Air Transport Association.  

The average passenger load factor for 2011 was 78.1%, down from 78.3% in 2011, while the freight load factor slipped even steeper. Capacity grew 6.3% for passenger flights and 4.1% for cargo, but could not keep up with demand.

“Given the weak conditions in Western economies the passenger market held up well in 2011,” IATA chief executive Tony Tyler said in a statement. “Healthy passenger growth, primarily in the first half of the year, was offset by a declining cargo market. Optimism in China contrasted with gloom in Europe.”

However Tyler says it’s too early to determine whether the growing trend will stick in 2012 given the ongoing eurozone crisis.  

“Improving business confidence and encouraging news from the US economy are heartening developments,” he said. “But it is far too early to start predicting a soft landing for 2012.”

He warned that a failure to achieve a durable solution to global economic woes will have “dire consequences” for economies around the world and will “most certainly tip the airline industry into the red.”

Airlines have been trying to adapt to higher fuel costs by ordering newer, more fuel-efficient planes like the Boeing (NYSE:BA) 737 MAX. But the IATA said governments need to do their part too by recognizing the airline industry, which transports 3 billion people a year and over a third of the world's value of goods, as a catalyst for economic growth. 

Meanwhile, international air travel grew 6.9% in 2011, with particularly strong growth of 8.2% from February to July. International capacity was up 8.2%, pushing load factor down to 77.4%.

Latin America led the industry in traffic growth with a 10.2% rise in demand and became the only region to outgrow capacity, while North America had the highest load factor for the year at 80.7%, as very slow demand growth was offset by tight capacity management.

Major U.S. carriers like American Airlines, Delta (NYSE:DAL) and UnitedContinental (NYSE:UAL) softened capacity during the year to save costs in the face of slumped demand and skyrocketing fuel costs.

In domestic markets, passenger demand grew 4.2% in 2011 compared with a 3.1% rise in capacity. U.S. demand crept up 1.3%, slowly because of the sluggish economy, while demand in China rose 10.9% as travel demand outpaced economic uncertainty.

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