"A sustained spike in fuel prices or the crack premium in jet fuel and/or customer resistance to fuel surcharges would escalate the crisis," it warned.
IATA said aggressive cost-cutting measures remain critical.
"There is no silver bullet, but every ounce of savings counts," it said.
For example, washing aircraft more frequently to reduce friction or using lighter catering equipment on board would have an incremental impact, it said.
IATA added that it was working with governments, airports and air traffic control in order to improve operations.
IATA has initiated five projects estimated to generate US$6.5 billion in savings for the industry annually, the "most urgent" of which is pushing for 100 percent electronic ticketing by 2007.
E-ticketing could save the industry an estimated US$3 billion a year.
IATA called on other sectors of the industry to help reduce costs, pointing out for example that airport and air navigation service charges account for 10 percent of airline operating expenses.
While airlines are expected to cut non-fuel costs by 4.5 percent this year -- in addition to reductions of 2 to 3 percent in previous years -- airport and air navigation charges remain relatively unchanged, IATA said.
"It is imperative that our partners in the value chain match our efforts," it said.
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