Airline Weekly - March 18, 2013
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Airline Weekly - March 18, 2013

Here Comes the Sun? Not so Fast: Europe’s airline industry will benefit from big reforms, but don’t get too excited

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Cover Story

Here Comes the Sun? Not so Fast: Europe’s airline industry will benefit from big reforms, but don’t get too excited

Finally, the darkest storm clouds seem to have passed in a region that will take whatever good news it can get. But hold off, for now, on any forecast that the sun will come out tomorrow.

For 2012’s fourth quarter, European airlines that have thus far reported did fractionally better, collectively, than during the same period a year earlier. Among sizeable airlines, those that were in the deepest trouble improved the most: Air Berlin (based on preliminary data) still lost money during the off-peak period but improved its operating margin a full 10 points (from -13% to -3%), while Norwegian turned red ink to black—a positive 3% this time rather than negative 3% a year earlier. Finnair and even Alitalia similarly broke even this time after losing money in 2011’s Q4.

Europe’s biggest legacy airlines, meanwhile, are restructuring more dramatically than ever before. Lufthansa’s “SCORE” program might sound like other predecessor programs with catchy names, but SCORE is far more ambitious. Air France is doing the unthinkable: cutting compensation and even cutting jobs, and not only through attrition. SAS went to the brink of liquidation and walked away with bankruptcy-like labor costs.

Other airlines like Malev and Spanair, of course, actually did liquidate during 2012; their demise helped the survivors. Tour operator-linked airlines like Thomas Cook are on the ropes, while others like Windjet have succumbed. Aside from Icelandair, Norwegian and Vueling, no important European airline is growing significantly; after years of lip service about the importance of capacity discipline, this real U.S.-style capacity discipline is pushing up yields. So why won’t all these hopeful signs usher in a new golden era for Europe’s airlines?

The last golden era ran from roughly 2004 through 2007. Europe’s economies and currencies were strong, as were its airlines’ fuel hedge positions, a combination that meant robust revenues and relatively benign costs. Global longhaul traffic was booming, a fact that helped European legacy airlines—which then, as now, got the majority of their revenue from longhaul—far more than U.S. legacy airlines, most of which were wallowing in bankruptcy. Emirates, Qatar Airways and Etihad existed but were quite a bit smaller. At least they didn’t yet compete in most secondary markets like Barcelona. Turkish Airlines too was, in global terms, still in its infancy.

In an interconnected world, every airline is to one degree or another exposed to most global trends. The difference between Europe and the U.S. is the degree to which these trends matter. For the foreseeable future, the helpful trends will matter most in the U.S., whereas the harmful trends will matter most in Europe.

Back to the Arabian Gulf big three plus... (464 of 1,856 words)

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Lufthansa is doing a bit better thsan its closest continental rivals. But that’s small consolation to a carrier besieged by foreign competition, economic stagnation and antagonistic government policies.

In Hong Kong, Cathay Pacific faces some of the same problems, including extremely high jet fuel prices and pressure from rivals like Emirates. And while Asia is certainly more economically dynamic than Europe, its airlines are more dependent on cargo markets, which remain depressed.

Latin America, with its strong economic growth and rather tame competition, propelled AviancaTaca to another good year in 2012. But LAN/TAM and Gol have yet to report their results, and the Brazilian market in particular is experiencing troubles.

Boeing’s troubles are fading, with B787s now expected back in the air within weeks, in time for the northern hemisphere’s busy summers season. All the while, the big plane builder is moving forward with a new and improved B777. It might, according to reports, be on the verge of a big Ryanair order too, this after winning a modest B777 order from Swiss last week.

Don’t feel bad for Airbus, though. It sold more than 100 A320s (including options) to Turkish Airlines.

Speaking of airlines with scores of A320s on order, the hyperactive AirAsia bought itself a stake in yet another airline, this time Zest Air in the Philippines. Elsewhere, Iberia’s war with unions came to an end, American settled a long and bitter dispute with Travelport and Air Canada reached a deal with its government regarding pension obligations for the years to come.

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