By Gabriel Araujo, Luciana Magalhães and Rajesh Kumar Singh

RIO DE JANEIRO, June 7 (Reuters) - The global aviation industry on Sunday cut its 2026 profit forecast by about half, citing the crisis in the Middle East that has raised fuel costs, disrupted key air routes and exposed the fragility of the industry, which operates on narrow profit margins.

The International Air Transport Association (IATA), which represents more than 370 airlines accounting for about 85 percent of global air traffic, predicted in its annual report that the sector is now on track to record total net profits of $23 billion in 2026, significantly lower than previous estimates of about $41 billion, and down from the $45 billion it recorded in 2025.

This reduction underscores the vulnerability of airlines to geopolitical shocks and fuel price volatility, even as demand for travel remains strong, aircraft occupancy rates are high, and revenues are expected to exceed $1.1 trillion.

"There are two main factors: the first is the sharp rise in jet fuel prices, which has far exceeded what I think anyone expected, and the second is the disruptions that airlines are facing in the Gulf region. This combination has led us to lower our forecasts," IATA Director General Willie Walsh told Reuters at the association's annual meeting in Rio de Janeiro.

Walsh added that he expects some smaller airlines to go bankrupt or be acquired by larger companies this year and next when the full impact of rising fuel costs becomes apparent. Spirit Airlines, the US low-cost carrier, closed last month, becoming the first casualty in the sector due to the Iran war.

He also predicted that airlines would cancel unprofitable destinations to protect their profit margins, while suggesting that ticket prices, which have risen since the outbreak of the Iran war, would remain at high levels in the near term.

Gulf airlines such as Emirates, Qatar Airways and Etihad Airways are facing the greatest uncertainty regarding their operations after a near-total shutdown and closure of airspace in the region since the start of the crisis.

Walsh said most regions will remain in a profit-making zone, but at lower levels, while Middle Eastern airlines will likely slip into losses due to the crisis and weaker demand for their flights.