With huge losses for European airlines and growth in the Asia-Pacific region, the pattern of the power shift in the air transport industry is firmly set. But Middle Eastern airlines are also driving consolidation and securing key positions that give them a tight grip on the industry's general agenda.

The new balance of power comes in several shapes and sometimes is apparent in tiny instances, such as occurred on the sidelines of last week's International Air Transport Association (IATA) annual general meeting in Beijing. But all of them send a strong message. Lufthansa CEO Christoph Franz has been the most vocal opponent of the three big Persian Gulf carriers— Emirates, Etihad Airways and Qatar Airways—criticizing them for being state-owned and subsidized. He believes that the Persian Gulf carriers enjoy other unfair advantages such as access to export financing, low or no taxes and cheap labor. Franz's rage culminated in the statement that the Persian Gulf countries are a “sandpit with money.”

But several high-level diplomatic interventions and a lunch date with Emirates President Tim Clark later, Franz now says he has “high respect for the entrepreneurial achievements” of his new competitors.

Their influence is stronger because Emirates, Etihad and Qatar continue to grow relentlessly, while other regions, and Europe in particular, are suffering. The shift may even lead to new partnerships in some cases. For example, Qantas has fought against the three exhaustively to protect its “Kangaroo route” between Australia and Europe, once a lucrative business. But this month, the Australian carrier said it will take a full-year net loss. Investor shock drove Qantas stock down 32%, shaving $1 billion from the company's market capitalization.

Qantas CEO Alan Joyce, who was still elected as IATA's new chairman of the board of governors, is under immense pressure to deliver improved results. But Emirates was quick to say it is interested in a “commercial arrangement” with Qantas, as Clark said here, noting that Emirates does not want to buy a stake in the largest Australian airline. As the three Persian Gulf carriers are offering attractive connecting services through their Middle East hubs, a deal with Emirates would be similar to admitting defeat for Qantas.

Emirates does, however, want access to local feed in Australia, particularly now that its rival Etihad is picking up a 4.99% stake in Virgin Australia. Etihad CEO James Hogan would like to increase the shareholding significantly, with the deep commercial alliance between the two that includes Etihad's wet-lease of a Virgin Australia Boeing 777-300ER.

Etihad is in negotiations with Air France over a possible code-sharing agreement, and it also has stakes in Air Seychelles, Air Berlin and Aer Lingus, and its Middle Eastern competitors are considering buying into other carriers, too. Qatar Airways has invested in Cargolux and was close to purchasing Spanair before pulling out of talks early this year. Turkish Airlines, fast-growing and ideally situated between Europe, Asia and Africa, is on the verge of taking a minority stake in LOT Polish Airlines. It is also imaginable that a Persian Gulf carrier could buy the International Airlines Group (IAG) stake that Spain's troubled financial institution Bankia might be forced to sell, a purchase no one would have foreseen a few years ago.

Qatar Airways and Etihad are also playing with the idea of joining one of the global alliances, as well. The sidelines of the IATA meeting were rife with rumors that Qatar Airways will announce it is joining Oneworld. But no announcement came, and CEO Akbar Al Baker refused to say anything on the matter. Industry executives indicate the process is not far enough along for anything more concrete at this stage.

But a potential Oneworld membership was about the only thing on which Al Baker did not have a comment, and the resonance of his opinions has grown, too. Previously, Al Baker wielded influence by writing multibillion-dollar checks for new Airbus and Boeing aircraft and scaring competitors with record rounds of passenger growth. Last year, he criticized IATA for being a club of the past, a nontransparent lobby representing the interests of old-style legacy carriers in the U.S. and Europe.

IATA's chairman for the past year, KLM CEO Peter Hartman, was forced to launch a review of the association's corporate governance and distribution of power, resulting in remarkable changes that were adopted by the general assembly. North America is losing a board seat and the Middle East and Africa are gaining one—to be filled by Al Baker. The Asia-Pacific region will also get more representation. Other governance changes include limiting board members to three three-year terms.

Hartman points out that the measures are “by no means” the end of the reforms and states that more changes can be made if members are in favor of them.

The shift in power is taking place against the backdrop of an industry on the edge, particularly in one of its former strongholds, Europe. IATA Director General and CEO Tony Tyler sees “serious downside risks” for the projected $3 billion profit of its members in 2012. “The biggest and most immediate risk is the crisis in the Eurozone,” he says. “If it evolves into a banking crisis, we could face a continent-wide recession—dragging the rest of the world and our profits down.” IATA's baseline forecast is for $631 billion in revenues and a $3 billion profit, a margin of 0.5%. But a 1% shift in revenues could turn the profit into a $3 billion loss.

That IATA was not forced to revise its forecast downward has to do with the fact that oil has become somewhat cheaper, relieving some pressure on operating costs. The cargo market appears to have put the worst behind it after sharply declining in the last 1-2 years, and passenger demand is still strong in several key markets, including Europe, whose airlines have nonetheless been unable to turn that demand into profitability. In fact, IATA's stable guidance masks significant deterioration in Europe, where the association now expects a combined loss of $1.1 billion, almost twice as much as it predicted only three months ago. North American airlines, by contrast, are now projected to reach a $1.4 billion profit, $500 million more than foreseen in March and a little better than in 2011.

Carriers in the Asia-Pacific region are struggling with continuing weakness in cargo traffic—despite some improvement in the first half of the year—as well as the economic slowdown in China and India, which still contribute two-thirds of the overall industry profit. The deteriorated European markets will lower Middle Eastern airline profits to $400 million from $500 million, although they are the fastest-growing carriers and have received 80% of the benefits of the slow rebound in cargo markets.

In the current cycle, global air transport profits peaked in 2010 at $15.8 billion, a margin of 2.9%. A year later, they fell to $7.9 billion, a 1.3% margin. Where they will go next depends largely on which risks will become realities and when.

IATA Chief Economist Brian Pearce says, “overall performance is still pretty good, except in Europe.” Cash flows are close to mid-cycle levels and airlines have managed to keep load factors up. Pearce notes that carriers have also added capacity at a slower pace. But he is worried this might change soon with an expected up-tick in aircraft deliveries from Airbus and Boeing this year.

“The problem is that the rest of this year looks very uncertain,” Pearce says. “We expect further deterioration in Europe; the second half will be worse.” The IATA guidance assumes anything up to and including a Greek exit from the Eurozone, but nothing more dramatic. The guidance also assumes a weak U.S. economic recovery, no hard landing of the Chinese economy, no Iran conflict and an average oil price of $110 per barrel.

To bolster airlines' ability to capitalize on demand, meanwhile, IATA is proceeding with its initiative for airline distribution. Tyler says the global distribution systems “have not been able to facilitate innovation like we have seen in other industries.” Therefore product innovations “cannot break free of product descriptions limited to booking classes such as F, C or Y and their derivatives,” he says.

IATA is working on new distribution standards that better enable airline differentiation; the foundation standard, to be defined this year, will be the basis for a common interface between airlines, consumer applications, distributors, travel agents or even other airlines. The common interface is also intended to allow airlines to make offers tailored to individual consumers. The business case for the new system and a road map for its implementation are to be presented at the World Passenger Symposium 2012 in Abu Dhabi in October.

Separately, to save costs, IATA is consolidating its global operations, reducing the number of local offices to 45 from 59. The remaining offices will in turn take on a broader role and drive global campaigns on a local level. The IATA financial settlement system will be consolidated into five hubs: Miami, Amman, Beijing, Madrid and Singapore.