Airline Weekly - July 4, 2011

Cover Story

Few Laughs in the First Half - Mid-year review: First six months of 2011 bring crisis and peril to the world’s airlines

Two thousand ten was a good year for the world’s airline industry. Maybe the best ever. If only the good times could last.

Last year’s resounding success—$30b in collective operating profits by IATA’s count—is now but a fading memory. Midway through 2011, airlines are looking back on six months of crisis and peril, most of it not of their own making.

On Jan. 1, 2011, the per-barrel price of WTI crude oil was $92, itself well above the 2010 average of $79. By March the price had reached $100, on its way to $113 before falling back to the low $90s in the last few weeks of June. The average price for the first six months of 2011: $98, compared to $78 for the same period in 2010, a 26% spike. Looking at Brent crude prices, which are particularly important for European airlines and have uncharacteristically diverged from WTI this year, prices averaged $111 per barrel in the first half, up a dizzying 44% y/y.

If the story ended there, it alone would explain a significant deterioration in airline financial results. But that was only the start of it. Violent political upheavals throughout North Africa and the Middle East not only decimated key tourist markets in the region. They also led airlines to redeploy aircraft to markets in other regions like Mediterranean Europe, creating oversupply and hence losses there. Sure enough, most European carriers experienced an awful start to 2011, their problems compounded by labor unrest, a eurozone debt crisis and a deep divergence between healthy economies like Germany and Sweden, on one hand, and gravely ill ones like Greece, Portugal, Ireland and Spain on the other. Nor did governments provide much help, choosing instead to impose new airline taxes (Germany and Austria) and block a planned merger between Greece’s Aegean and Olympic (the E.U. competition commission). Second quarter results aren’t yet published, but in the first quarter alone, Europe’s airlines amassed more than $2b in operating losses.

Booming East Asia, meanwhile, had its own crisis to manage, one that left airlines throughout the world with heavy losses, European airlines included. A massive earthquake in Japan, which triggered a massive tsunami, which triggered a severe nuclear scare, crippled air travel in the world’s third-largest economy—and... (401 of 1,605 words)

Also Inside this Issue:

Welcome to the third quarter of 2011, which follows a first half depressed by natural disasters, political strife and another bout of uncomfortably high fuel prices. Uncomfortable as things were, however, supply and demand conditions were still favorable enough to cultivate second quarter profits for at least some airlines. Delta, for example, said it’s going to post a profit for the peak April-to-June period, albeit one smaller than it earned during the same quarter a year ago.

The final days of the second quarter brought unwelcome news to Air Canada and United, two Star Alliance members already joint venturing across the Atlantic. Problem is, their plan to joint venture across the U.S.-Canadian border is opposed by Canadian regulators, who last week moved to block it.

Consolidation of another sort came in the northern reaches of Europe, where the strategically innovative Flybe executed an elaborate takeover of a Finnish regional carrier in conjunction with new contract flying for Finnair. Flybe also unveiled annual financial results (a modest profit ex special items) for its fiscal year that ended in March.

In Australia, the grounding of Tiger’s domestic operation is causing chaos, leading Qantas mechanics to mercifully delay their strike plans. Elsewhere, Singapore Airlines ordered more A330s and began flying A380s to Los Angeles (from its home hub via Tokyo Narita). Qatar Airways began flying to Montreal from Doha and Delta to Shanghai from Detroit.

Later this month: Q2 earnings season begins.

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