So far, 2017 is proving to be a double-edged sword for the world’s airlines. On the one hand, air travel demand is more robust than expected as the global economy remains more stable than predicted. On the other hand, higher fuel prices and escalating labor costs are squeezing airline profit margins.

The global economy is “looking fairly positive at the moment,” IATA chief economist Brian Pearce said in early May at the Wings of Change conference in Miami. “In the last six to nine 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 in 2017 reverses a situation from 2016, when fears were prevalent that airline capacity was starting to outstrip demand, Pearce noted.

There is “still risk out there” from nationalist political movements that may pursue protectionist policies detrimental to global air transport, Pearce said, but that risk—a major reason why 2017 air traffic growth projections had been cautious—appears to be alleviating. 

The biggest cause for the global economy’s stability—and likely continued growth—is that the enthusiasm among governments to tightly control spending has receded, Pearce said. 

“Austerity budgets ended a few years ago and we’ve seen quite a bit of stimulus, particularly from China,” he explained. “This has been helpful to get the economy growing again.”

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

Steady airline profits have created new expectations from labor. American Airlines in late April announced a mid-contract pay raise for its pilots and flight attendants, an unprecedented move criticized by some Wall Street analysts, but defended by American chairman and CEO Doug Parker 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,” Pearce 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.”

Parker said the pay increase, implemented to put American crews on par with salary levels at rivals Delta Air Lines and United Airlines, is a sign of a maturing industry following years of bankruptcies and mergers. He believes US airline salaries are unlikely to rise at an uncontrollable pace.

“Look, we’re comfortable with the commitment,” Parker told skeptical Wall Street analysts. “We’re indeed not leading this charge. We’re just making sure we’re catching up … I don’t think it’s that different than if you saw another airline make a dramatic change in their inflight product and we matched that.”

Parker argued that the rise in fuel and labor costs can be framed as good news for airlines because it shows the industry can remain profitable even when its highest areas of expenditure increase. “Employee pay has increased at a rate that has never been seen before,” he explained, adding, “Fuel prices, indeed, have increased from where they were a year ago by 20%, 30% … We still have a business that is producing returns like it’s never seen before.”

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 asserted 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 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.”