Airline Weekly - June 7, 2010
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Airline Weekly - June 7, 2010

Europe’s Funk: E.U. carriers hit with a barrage of setbacks. Can they recover?

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Cover Story

Europe’s Funk: E.U. carriers hit with a barrage of setbacks. Can they recover?

For Europe’s embattled airlines, the swirl of bad news just keeps getting worse. Last week, even the indomitable Ryanair posted a heavy loss in the January-to-March quarter—and that’s before any ash cloud losses. It’s hard to conceive of a more toxic brew of developments weighing on the E.U.’s airline industry during the first half of 2010: freakishly bad weather, labor strikes, a plummeting euro, a y/y spike in fuel prices, wrong-way fuel hedges, expensive new security directives after a December terrorism scare, a structural decline in shorthaul premium traffic, an onslaught of new capacity from Arabian Gulf carriers, an updated open skies agreement with the U.S. that didn’t give many E.U. carriers the ownership liberalization they wanted, declining share prices, higher taxes, socio-economic breakdown in Greece, a spreading fiscal and financial crisis, weak economic growth, an aging population, a new U.K. government that opposes plans for a third runway at Heathrow and, of course, the infamous ash cloud. Ugh.

The heartache is painfully clear in first quarter financial results. Including Ryanair’s uncharacteristically troubled quarter, the continent’s top 12 publicly-traded airlines (not including Turkish Airlines or semiannually reporting easyJet) posted a collective net loss of $1.8b and an operating margin of negative 7% ex special items. The normally hapless U.S. airline sector, by contrast, lost less than $1b net and actually posted a small operating profit. And whereas in the U.S. only one airline (American) posted anything worse than a negative 2% operating margin, none of the 12 European carriers did any better than negative 5%.

Believe it or not, Europe’s dismal Q1 operating results did in fact represent a several point improvement over last year’s Q1, thanks mostly to less severe losses at British Airways (which saw a nine point y/y margin improvement), Iberia (up six points) and Air France/KLM (five points). Finnair, SAS and Vueling showed y/y improvements as well, while Lufthansa, Norwegian, Ryanair and Air Berlin did not. Aer Lingus did not report quarterly last year. In addition, this year’s Q1 got a bit of help from the Easter travel period, which started in late March this year but fell entirely in April last year. So yes there was y/y improvement, but from an awful base and with some helpful calendar effects.

IATA figures released last week show Europe as the worst performing region of the world in Q1—and the only one of four major blocks (North America, Asia-Pacific and Latin America are the others) that even lost money at all at the operating level. IATA added that European airline share prices declined 25% in May and are now down 20% so far the year. U.S. airline share prices, by contrast, are up 9% this year even after recent stock market turbulence. (471 of 1651 words)

Also Inside this Issue:

Not even Ryanair could escape the heavy losses that rained on Europe’s airlines during the dismal first quarter. But at least, unlike most of its legacy rivals, the light at the end of its tunnel is bright.

The same is true for just about any airline located in the ASEAN region, a utopia of sorts for the industry. AirAsia, its largest and most successful LCC, had another great quarter and sees strong demand trends for the months ahead. A number of its rivals, meanwhile—including Tiger Airways, Jetstar and Cebu Pacific—are also planning ambitious expansions.

Traffic is also surging from last year’s depressed levels in Russia, where Aeroflot is hoping to recover from 2009 losses at its core passenger business. But the Russian airline industry is anything but utopian, saddled as it is with over-regulation and under-stimulation.

If stimulation is your fancy, look no further than the Middle East. More new routes launched there last week, while Emirates announced another mass hiring spree, this time for pilots. Contrast this with the U.K, where traffic is shrinking (passenger volumes fell 7% last year), airports are maxed out on capacity and workers are striking.

Trends look much better in the U.S., where capacity discipline and reasonably solid economic recovery are boosting yields. Developments in Canada, too— where the economy didn’t contract as much during the recession—have WestJet, for one, feeling rather confident. Its smaller rival Porter, though, had to withdraw its IPO.

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