Global airlines banished two years of misery with an abrupt turnaround in industry forecasts as the world economy recovers, but laced their outlook with caution on carriers in debt-laden Europe.

The fragility of the recovery was underscored by a broad fall in global markets and a slide in the euro to multi-year lows on Monday on a renewed crisis of confidence in government debt and the health of the U.S. economy.

The International Air Transport Association said it now expects global airlines to report a $2.5 billion profit this year, an improvement of more than $5 billion from its forecast of a loss just three months ago.

IATA Chief Executive Giovanni Bisignani said the global economy was improving more quickly than anyone expected, boosting traffic and yields sharply -- something unthinkable even two months ago during Europe's volcanic ash crisis.

But Europe, mired in debt and bad feelings over flight cancellations during the ash crisis, is expected to lag -- particularly if a summer of strikes paralyses air travel.

We have a currency problem, we have the volcano that struck in April ... and we have some tension with labor unions, so those three aspects are making the difference, Bisignani told Reuters Insider TV on the sidelines of the AGM.

IATA said European airlines are still expected to lose $2.8 billion this year, almost 30 percent more than its forecast in March.

The overall outlook became the highlight of the opening of IATA's meeting, supported by comments from the industry.

We are seeing a recovery around the world. I would like to call it a fragile recovery. There is still a lot to be worried about. But companies are sending their people back on the road, American Airlines CEO Gerard Arpey told reporters.

German flagship carrier Lufthansa said passenger numbers were improving, but yields were still below the year-earlier level. LAN CEO Enrique Cueto told Reuters his airline was optimistic, based on June traffic so far.

Scandinavian airline SAS also reported an increase in traffic, particularly in some global routes.

Nothing could beat the buzz around Asia-Pacific, though, which was celebrated as the industry's growth market.

In Asia-Pacific, life's a lot easier. It's still a growing market. My counterparts have to deal with very mature markets. In Asia-Pacific, growth figures are much more robust, Cathay Pacific <0293.HK> CEO Tony Tyler said at a press conference.

PLANES FLY OFF SHELVES

The general note of optimism could spread to planemakers represented at the Berlin Air Show. A regional event usually dwarfed by others, the June 8-13 show could come into its own.

John Leahy, sales chief at Airbus, a unit of the aerospace and defense group EADS , told Reuters late on Sunday he would be unveiling deals at the show. There has been speculation that industry heavyweight Emirates , the top Airbus customer, could be bulking up its fleet soon.

Meanwhile, the chief executive of Boeing Commercial Airplanes said the planemaker was working on a number of deals to sell 777 and 787 long-haul aircraft.

Labor UNREST

But, as is so often the case with the airline industry, the good news is tempered with more bad news.

British Airways is in the midst of a series of cabin crew walkouts, and labor unrest looms at Lufthansa.

BA Chief Executive Willie Walsh, in Berlin despite being taunted by union leaders for not staying to negotiate an end to the bitter dispute over conditions, roundly criticized the Unite union that represents the cabin staff.

They have failed in their efforts and they will continue to fail to shut down the airline, Walsh told Reuters on the sidelines of a Oneworld airline alliance presentation.

Walsh also said there was no trade-off point for the airline between the cost savings it has made from cuts and the ongoing costs of the strike itself.

(Additional reporting by Ben Berkowitz, Angelika Gruber and Tim Hepher; Editing by David Cowell and Erica Billingham)

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