Airline Weekly - May 24, 2010

Cover Story

Fall From Greece: Long-profitable Aegean Airlines, facing sudden crisis, merges with the enemy

What happens to a promising airline when its home country suffers an economic meltdown? Ask Aegean Airlines, Greece’s largest airline and a consistent profit maker—until now.

Aegean will report first quarter financial results on Wednesday, but we already know this: During the final quarter of 2009, when Greece’s untidy government finances sparked a rise in unemployment, taxation, labor strikes and even civil unrest, Aegean endured a negative 11% operating margin, worse than anything it’s experienced since becoming a publicly-traded company in July 2007. It still earned a positive 5% operating margin for all of 2009, extending a streak of annual profitability that began in 2003. But that was below the 8% it earned in 2008 and the 7% it earned in 2007. The ten-year old airline’s sterling record of growth and improvement, in other words, faced an abrupt halt.

Will its woes continue into 2010? Yes, believes Aegean’s management, which said during its Q4 conference call that “this will be a tough year,” one resembling the last three months of 2009. It worries not just about the dismal prospects of the Greek economy and its impact on outbound demand, but also about tepid growth throughout Europe, by far the largest source market for inbound tourists. The U.K. and Germany, in particular, send lots of summertime sun-seekers to Greece’s shores, and incomes in these two countries aren’t exactly skyrocketing. A weaker euro might attract more U.S. tourists to Greece, but Aegean doesn’t fly to the U.S. And a weaker euro also means upward pressure on fuel costs. Nor can ash cloud cancellations and images of riots in Athens be good for business.

To make matters worse, the Greek market is still intensely competitive, with many carriers even increasing their capacity during the downturn. In 2009, the airport serving Athens was one of Europe’s best performing in terms of traffic, with passenger volumes down just 2% y/y. The average decline for the rest of Europe was 6%. During the first quarter, moreover, volumes at Athens were up 10% (13% domestic and 9% international). This is partly thanks to airlines... (363 of 1454 words)

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Poor British Airways. Its costs are falling. Its revenues are rising. But it can’t escape heartache amid strikes, snowstorms, volcanoes and unhelpful government policies. After an encouraging end to 2009, it slipped back to uncomfortably large losses in early 2010. It now faces another round of flight attendant strikes this week.

Air France/KLM had more harmonious labor relations (ten years ago, did you think you’d ever hear that?) but similarly large calendar Q1 losses. In its case, huge legacy fuel hedges proved the key spoiler.

At Singapore Airlines, hedge losses fell dramatically from a year ago and profits were once again characteristically strong, if not quite as strong as they were two years ago. Elsewhere in East Asia, Korean Air did well in Q1 but continues to suffer from heavy indebtedness while Malaysia Airlines managed a sharp y/y turnaround. In India, meanwhile, Jet Airways also has some debt discomfort but is nevertheless profitable and growing again.

It’s been several weeks since U.S. carriers reported their Q1 results and several weeks since United and Continental made their big merger announcement. Since then, wars between LCCs have intensified, with a particularly harsh assault being launched by AirTran on Republic’s Frontier. AirTran and Southwest are also going at it, as are Southwest and JetBlue.

Beyond the world of airline business, another tragic plane crash occurred last week, this one involving an Air India B737-800 landing on an operationally tough runway in Mangalore. Eight people survived, but 158 others lost their lives. 

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