IATA has warned that both passengers and freight demand are slowing significantly with a warning from its DG and CEO Tony Tyler that “the industry is shifting gears downwards.”

While passenger demand was up 4.5% over the previous August, it represents a significant slowing from the 6% growth recorded in July, according to IATA. Worse, however, is the decline in freight markets, which accelerated with a 3.8% contraction for August, more than double the pace of July’s 1.8% decline, it said.

“The pace of growth in passenger markets has dipped and the freight business is now shrinking at a faster pace,” Tyler said. “With business and consumer confidence continuing to slump globally there is not a lot of optimism for improved conditions any time soon.”

IATA said that European airlines achieved the strongest growth in international passenger traffic in August with a 7.9% increase, just slightly below a capacity expansion of 8.2%. According to IATA, although domestic economies and leisure travel are weak, strong exports have led to increased business travel on international markets.

However, while August growth was the strongest in the industry, IATA said it “should be noted that this is below the 10.6% demand expansion reported for the first eight months of the year, indicating that markets are softening.”

Middle Eastern carriers recorded the second highest demand growth at 6.7% while North American carriers reported the weakest performance with growth of just 2.9%.

Of greatest concern is Chinese domestic travel demand, which was up only 2.8% on the previous August, well down from the double-digit growth over the past two years, it said.

IATA said that global freight markets are showing clear signs of decline compared to the same month in the previous year. It noted that, while weakness in airfreight represented a loss of market share to other transport modes in the second half of 2010, in 2011 airfreight reflected the lack of growth in overall world trade volumes.

“This latest decline shows a further deterioration in global economic conditions,” said IATA, which noted the decline has been most prominent in the largest markets.

North American carriers reported a 7% fall in cargo volume for August compared to the previous year, followed by carriers in Asia-Pacific (-5.4%) and Europe (-1.8%).

However, operators in Africa (+2.2%), Latin America (+5.4%) and the Middle East (+3.7%) remained positive.

IATA warned that airlines are bracing for tough times ahead.

“Economic uncertainty owing to the European sovereign debt crisis and the growing likelihood of a protracted period of slow growth in developed economies mean the industry will be even more focused on reducing costs and improving efficiency. To ensure that airlines can continue to catalyze economic activity, we need governments to review the often onerous tax burden that they place on aviation,” Tyler said.

Last week, the UK government decided to reduce long-haul Air Passenger Duty (APD) for Northern Ireland to short-haul levels. “APD is the biggest tax that we face anywhere in the world. Reducing APD for Northern Ireland is a clear recognition of the economic damage that it does. But why stop with Northern Ireland? The competitiveness of the entire UK transport sector is suffering. As a priority, the same reduction must now be made for the whole of the UK, for the benefit of the UK. This would provide a much needed boost to the UK economy, businesses and travelers with more competitive connectivity,” Tyler said.