* IATA cuts 2026 profit forecast on fuel costs and war

disruption

* Iran war drives up fuel bills, reroutes flights, hits

margins

* Airlines expected to cut routes, keep fares high

By Gabriel Araujo, Luciana Magalhaes, Rajesh Kumar Singh and

Allison Lampert

RIO DE JANEIRO, June 7 (Reuters) - The global airline

industry nearly halved its 2026 profit forecast on Sunday,

citing conflict in the Middle East that has driven up fuel

costs, disrupted key air corridors and exposed the fragility of

a sector operating on thin margins.

The International Air Transport Association, which

represents more than 370 airlines accounting for about 85% of

global air traffic, said in its annual report that it now

expects the industry to post a combined net profit of $23

billion in 2026, well below a previous projection of about $41

billion and down from $45 billion in 2025.

The downgrade underscores airlines' exposure to geopolitical

shocks and fuel volatility, even as passenger demand remains

resilient, planes are flying fuller and revenues are set to rise

to more than $1.1 trillion.

"There are two major factors: one is the significant

increase in jet fuel prices, which has gone way higher than I

think anybody would have expected, and then the disruption to

the airlines in the Gulf region, so that combination has led us

to reduce the forecast," IATA Director General Willie Walsh told

Reuters at the group's annual meeting in Rio de Janeiro.

Walsh said he expects some smaller airlines to go bankrupt or be

taken over by bigger carriers this year and next as higher fuel

costs bite. U.S. low-cost carrier Spirit Airlines shut down last

month, the first airline casualty of the Iran war.

Airlines are also expected to cut unprofitable routes to

protect margins, while fares - which have surged since the start

of the Iran war - are unlikely to fall soon, Walsh said.

"In an environment where demand remains pretty robust, but

capacity comes down, that will likely lead to a situation where

fares will remain elevated," Walsh said.

FUEL COST SHOCK WIPES OUT HIGHER REVENUES

The Middle East conflict, triggered by U.S. and Israeli

airstrikes on Iran, has forced airlines to reroute flights

around closed or restricted airspace, adding hours to some

journeys, increasing fuel burn and straining already tight

capacity.

At the same time, oil prices have surged on fears of supply

disruption, pushing jet fuel prices sharply higher and widening

refinery margins, leaving airlines facing a steep jump in their

largest cost.

Gulf airlines such as Emirates, Qatar Airways and Etihad

Airways face the greatest operational uncertainty after a

near-complete shutdown of regional airspace at the start of the

conflict.

Walsh said most regions should remain profitable, though at

lower levels, while Middle East airlines are likely to slip into

the red due to the conflict and weaker demand.

IATA expects airlines' fuel bill to surge to about $350

billion this year from roughly $252 billion in 2025, with fuel

accounting for nearly a third of operating costs.

That is eroding profitability per passenger, with airlines

now expected to earn about $4.50 per passenger, roughly half

last year's level.

On the upside, IATA expects industry revenues to rise 9.4%

to around $1.16 trillion this year, driven by steady travel

demand, higher fares, and growing income from extras such as

seat upgrades and onboard services.

Aircraft shortages are also squeezing the sector. Delivery

delays at Boeing ( BA ) and Airbus are forcing airlines to keep older,

less fuel-efficient planes in service for longer, raising

maintenance bills and blunting efforts to improve margins, Walsh

said.