Volatility caused by the eurozone crisis – highlighted by the Cyprus financial bailout crisis – will continue to buffet airlines in Europe during 2013, Iata warns.

European carriers are predicted to barely break even this year due to a weak domestic market reflecting recessionary conditions across the continent.

However, airlines are expected to show stronger performance on long-haul routes to emerging markets, according to Iata.

Overall demand for European carriers is expected to grow by 2.6% which is in line with a capacity expansion of 2.5%.

The forecast came as the airline industry organisation issued a “modest improvement” in its global outlook for the year.

Iata now expects airlines to produce a combined net post-tax profit margin of 1.6%, up from the previously forecast 1.3%, with a net post-tax profit of $10.6 billion, up from the previously projected $8.4 billion.

Director general and chief executive Tony Tyler (pictured) said: “Industry profits are taking a small step in the right direction. Against a backdrop of improved optimism for global economic prospects passenger demand has been strong and cargo markets are starting to grow again.

“The economic optimism is also pushing fuel prices higher. We are seeing a $12 billion improvement in revenue, and a $9-10 billion increase in costs – most of which is related to fuel.”

But Iata warned that “considerable risks” could derail recovery.

The outlook is based on evidence of growing business confidence. But controversy over the draconian bailout proposal for Cypriot financial institutions is a clear indicator that the eurozone crisis is not over and could take a turn for the worse.

Tyler said: “European Central Bank commitments with respect to the eurozone crisis and the slow economic recovery in the US should be pointing us towards a durable, if weak, upswing.

“But we have had two false starts already. Improving conditions in early 2011 and 2012 disintegrated as the eurozone crisis intensified. And it could happen again. The impact of the unfolding situation in Cyprus is a risk factor that cannot be ignored.”

He added: “The UK’s Air Passenger Duty – the highest aviation tax in the world – will increase again on April 1. Airlines don’t want special treatment, but they do need a joined-up policy framework that enables them to meet the growing needs for connectivity sustainably.

“With a 1.6% net profit margin, there is very little buffer between profit and loss.”