Airline Weekly - June 4, 2012
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Airline Weekly - June 4, 2012

Short Selling: Europe’s shorthaul market remains a mess. But reforms are taking hold as summer approaches

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Short Selling: Europe’s shorthaul market remains a mess. But reforms are taking hold as summer approaches

Europe’s shorthaul airline market is not small. But nor is it profitable, at least for most of the airlines serving it.

In 2010, according to data published last month, the number of air travelers flying within or between the 27 nations of the European Union reached 486m—call it 500m-plus including the non-EU countries Switzerland and Norway. This 500m, incidentally, equals the roughly 500m people living within the E.U. 27 plus two.

As Ryanair likes to say, however, this one-to-one ratio of people to air travelers isn’t as high as it could be. In the U.S., for example, with a population of just 310m, the number of domestic air travelers reached 632m in 2010. Of course, the U.S. is a larger market geographically and is thus more dependent on air travel. Its rail network is far less developed, and its labor force is far more mobile, unconstrained by linguistic or cultural barriers (when’s the last time you saw a German taxi driver in Greece?) and in some cases regulatory barriers too. Moreover, as burdensome as taxes and regulatory constraints are on U.S. airlines, they’re less burdensome than in Europe.

But Europe’s legacy airlines, as well as some of its low-cost carriers, worry less about their shorthaul market’s size differential relative to the U.S. than about their shorthaul market’s inferior financial returns. Until about a half decade ago, the U.S. domestic market was a bloody battlefield for most airlines, tormented by one LCC: Southwest. But today, thanks to the three Cs—consolidation, capacity cuts and charging for everything—nearly all U.S. airlines are making money in their home market. Southwest’s higher costs these days, no longer masked by uniquely beneficial fuel hedges, have also leveled the playing field for everyone else.

The story is different within Europe. Predominantly longhaul carriers like Air France/KLM, Lufthansa, Finnair and Iberia have complained bitterly about their incessant shorthaul losses, in Air France’s case reaching €700m last year (then about $1b). At the same time, predominantly shorthaul carriers from Alitalia to Aegean to Adria to Air Berlin are losing money too, and those are just the airlines that begin with the letter A. Europe, again in contrast with the U.S., remains a highly fragmented market, with more than 100 different airline brands offering scheduled service. Malev, Spanair and Cimber Sterling might be gone, but Air... (406 of 1,622 words)

Also Inside this Issue:

Oil prices can fall for many different reasons: easing geopolitical tensions, increased production, people driving more fuel-efficient cars and so on. But last week, they fell mostly on worries about the global economy. A weak U.S. jobs market, a potential euro crisis bubbling in Greece and Spain, a slowdown in China and mounting troubles in emerging markets all pointed to a decline in oil usage—reduced economic activity means reduced demand for energy.

But many airlines will take that deal. Oil prices are now roughly where they were in 2010, when the industry enjoyed a profit bonanza (by their meager standards, anyway). Oil’s fall, moreover, will likely reignite consumer economies, most notably America’s. And airlines, currently built and sized for $100-plus oil, just saw their chief cost item plunge 17% y/y. As for demand, slower global growth will indeed reduce both the need for business travel and the means for leisure travel—in the short term. But what better time to stimulate demand with lower fares than right after your top cost item plummets in price.

For some airlines, oil’s fall hasn’t come a moment too soon. Greece’s Aegean badly needs cost relief after suffering weak revenues this winter. And India’s airlines need cheaper oil to offset a weakening currency, a slowing economy and excess capacity.

Excess capacity is hardly a problem in Houston, but United is cutting there anyway, mostly out of anger and spite following the city’s support for Southwest’s international ambitions.

Elsewhere, Saudia joined SkyTeam, Malaysia got its first A380 and Lufthansa flew its first B747-8.

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