Airline Weekly - August 2, 2010
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Airline Weekly - August 2, 2010

The Transatlantic Flip: America’s Big Five now outperforming Europe’s Big Three

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Cover Story

The Transatlantic Flip: America’s Big Five now outperforming Europe’s Big Three

It used to be the other way around.

For much of the past decade, the largest international airlines in the U.S. looked upon their European counterparts with envy—in turn quite a change from the 1990s, when Washington had to work hard to convince frightened European countries that various open skies treaties wouldn’t lead to U.S. dominance across the Atlantic. Now, however, big U.S. airlines, while hardly dominating their transatlantic peers, are for the first time in a long time outperforming them.

During the second quarter, a peak period on both sides of the Atlantic, America’s Big Five collectively earned a 9% operating margin, higher than anything they earned even during the 2006-to-2008 demand boom. The E.U.’s Big Three, meanwhile, managed only 4%, and that’s excluding the negative impact from April’s volcano-induced airspace closure. For the first six months of 2010, only American among the nine largest U.S. airlines lost money. But Lufthansa, Air France/KLM and British Airways were all in the red. As for their full year outlook, most U.S. carriers expect profits while Air France/KLM and British Airways, anyway, expect to merely break even.

Before looking at the causes of this reversal in fortune, consider what the world looked like during much of the last decade. What followed the many open skies pacts of the 1990s between the U.S. and individual European countries was 9/11, which hurt U.S. carriers more; a major fuel spike, which hurt U.S. carriers more; explosive growth by low-cost carriers, which hurt U.S. carriers more; and an economic boom in emerging markets, which helped everyone but helped U.S. carriers less than others. Put another way, Europe’s major airlines were more exposed to emerging markets, less exposed to LCC-ridden shorthaul markets and less exposed to the worst of the fuel spike thanks to hedges and strong currencies.

The E.U.’s largest carriers could also chase oil money more effectively—their hubs were closer to oil markets like the Middle East and Africa—and grow traffic and revenue more easily by grabbing business from the many shrinking and dying airlines (think Sabena, Alitalia, Austrian and SAS) surrounding them. And if they weren’t stealing from the vulnerable, they were merging with them (think KLM and Swiss). All of this... (382 of 1531 words)

Also Inside this Issue:

More earnings reports from the field, this time featuring Europe’s influential Big Three. None did as well as their U.S. counterparts, and not only because of the ash cloud in April. As IATA said last week, Europe’s traffic recovery is happening at just half the speed of that in Asia, and slower than that in North America as well.

Europe has some reasons for optimism, though. Cargo markets are rebounding rapidly, June was a strong month and advance bookings look promising. So do the transatlantic joint ventures now coalescing.

Elsewhere in Europe, Alitalia lost money again but Vueling did well, joining Ryanair if not Norwegian among LCCs posting big profits this spring.

In the U.S., the remarkable Southwest, never mind its domestic-only network and rising unit costs, bested all of its major rivals in terms of Q2 operating margin. Another perennial winner, South America’s LAN, similarly posted double-digit operating margins. Singapore Airlines, which suffered far more during the downturn, made a nice recovery, while India’s SpiceJet gave more reason to believe that it’s a carrier with a bright future. Less encouraging were results posted by Japan’s All Nippon.

In alliance news, Air Berlin is in (to oneworld) and Shanghai Airlines is out (of Star). United and Continental named a new executive management team to run the combined carrier, and Virgin Atlantic unveiled a new corporate image.

More earnings this week, including Canada’s two main airlines.

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