The recent global stock market turmoil is also expected to take a toll on air travel, particularly in business class where full-service airlines earn most of their profits, said Tony Tyler, director general of the International Air Transport Association.
"Airlines in this region are finding profitability quite thin because of the pressure of strong competition, and there's a lot of capacity in the market," Tyler told reporters ahead of the Singapore Airshow on Tuesday.
"When you take the strong competition from low-cost carriers in the region... and you take the very strong competition for long-haul traffic from the Gulf carriers, profitability for airlines in this region is not strong at all." IATA in December estimated global airlines' net profit for 2016 at $36.3 billion, up 10 per cent from its estimate of $33 billion for 2015.
But Tyler said more than half of this year's profit would come from North America, with earnings by Southeast Asian carriers likely to come under heavy pressure.
Underscoring the challenge, Tyler said no-frills carriers now account for 54 per cent of capacity in Southeast Asia, up from around 38 per cent in 2009.
Comparably, budget airlines account for 31 per cent of capacity in the United States and 39 per cent in Europe. The global average is 26 per cent.
Budget carriers like Malaysia's AirAsia, Indonesia's Lion Air, Singapore-based Jetstar, Thaland's Nok Air, Cebu Pacific of the Philippines and Vietnam's Vietjet are giving regional industry mainstays like Singapore Airlines a tough challenge.
Tyler said Southeast Asian legacy airlines "can play to their particular strengths" to compete, leveraging on their strong brands and service quality.
They must also keep cutting costs and investing in modern fuel-efficient planes, he said.
"The airlines in this part of the world are generally well run, efficient businesses and they're quite capable of competing... but it's just certainly at the moment a tough market," the IATA chief said.