UPDATE 1-Air cargo drops in May, recovery still far off-IATA

* Air freight drops sharply in May, showing recovery far off
* Cross-border passenger traffic also weakens further
* Mexican carriers see 40 pct traffic drop due H1N1 flu
By Laura MacInnis
GENEVA, June 25 (Reuters) - Demand for cross-border air freight dropped 17.4 percent year-on-year in May, suggesting international trade is still a long way from recovery, a global airlines body said on Thursday.
The International Air Transport Association (IATA) said that passenger demand fell a more modest 9.3 percent year-on-year in May, and repeated its view that for airlines, "this crisis is the worst we have ever seen".
"We have lost several years of growth and yields are under severe pressure. Airlines are in survival mode. Cutting costs and conserving cash are the priorities," Giovanni Bisignani, IATA's director-general, said in a statement.
The latest reading of international air traffic includes the first estimate of the impact of H1N1 flu on airline travel.
Mexican carriers saw their passenger traffic fall nearly 40 percent in May, compared to a 9.2 percent drop among all Latin American airlines, said IATA, which represents 230 carriers including United Airlines (UAUA.O), Cathay Pacific (0293.HK), Emirates [EMIRA.UL] and British Airways (BAY.L).
U.S. airlines also reported weak demand to Latin American destinations affected by the newly-discovered virus which has now spread to a global pandemic, the figures show. [ID:nNLB765857]
Air cargo is a leading indicator for world trade, and equity markets are watching it closely for signs of economic recovery.
IATA said the 17.4 percent drop is a relative improvement compared to the 21.7 percent year-on-year fall in April, but remains far from full health.
It said although manufacturers have begun to add to their product inventories in anticipation of an eventual economic rebound, "inventories remain 10 to 15 percent higher than normal in relation to sales levels, indicating that a significant recovery is not expected in the near term".
Passenger traffic demand is slightly stronger than the 11 percent drop seen in March, indicating "a floor may have been reached," but it also has a long way to go, said IATA, which has estimated airlines will lose $9 billion in 2009. [ID:nL8380291] (For the full IATA statement, see: www.iata.org) (Reporting by Laura MacInnis; editing by Mike Nesbit)