Global air travel demand is more robust than expected so far in 2017 because of growing business and consumer confidence, according to IATA chief economist Brian Pearce.

Speaking at the IATA Wings of Change conference in Miami, Pearce said the passenger traffic demand outlook looks strong for the remainder of the year, although he cautioned that airline profit margins are being squeezed by higher fuel and labor costs.

The global economy is “looking fairly positive at the moment,” Pearce said. “In the last 6-9 months, we’ve seen a pretty strong and steady improvement in business confidence, and that’s always good for economic growth. Consumers have been getting confident after hitting a low patch about a year ago. That all adds up to a positive outlook. The industry overall is seeing [2017 passenger traffic] growth of 7%. We had been expecting a slowdown … People are confident. They want to travel.”

The strong demand for air travel reverses a situation from last year when there were fears that airline capacity was outstripping demand, Pearce said.

But costs are rising for airlines, putting pressure on profit margins, he noted. “Rising fuel costs, particularly for European and Asian carriers, which are seeing fuel hedges rolling off,” are affecting bottom lines, Pearce told ATW following his presentation. In North America, higher labor costs are expected to push full-year 2017 profit margins to about 8%, down slightly year-over-year.

American Airlines last week announced a mid-contract pay raise for its pilots and flight attendants, a move criticized by some Wall Street analysts, but defended by American as a necessary long-term investment.

Pearce took no position on the American salary increase, but said US airlines—which have posted record profits over the last few years—need to ensure their cost structure continues to deliver a healthy return on invested capital for shareholders. “There’s a balance to be struck here,” he said. “Airlines want to share some of their success with their workers. Clearly, the industry needs to develop a cost structure that’s fit for the next downturn.”

Asked what could derail the current cycle of positive airline profitability, Pearce said, “An unexpected shock. That’s the sort of thing that stops cycles in their tracks.” But he said that, barring the unforeseen, the prospects for airlines look good, especially in North America.

“At the moment, it looks as if businesses and consumers have been feeling more secure,” Pearce said. “So I think we’ve got a couple more of years of economic growth ahead … In terms of airline profitability, globally the airline industry looks pretty different today than it looked just a few years ago. We’ve seen profitability peaking.”

Aaron Karp aaron.karp@penton.com