Airline Weekly - September 3, 2012
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Airline Weekly - September 3, 2012

Descending Into Darkness: Why Europe’s airline sector, now deeply troubled, is no longer defying macroeconomic trends

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Cover Story

Descending Into Darkness: Why Europe’s airline sector, now deeply troubled, is no longer defying macroeconomic trends

At first glance, the statistics tell a tale of success. Indeed, most European airlines made money this spring, in many cases while maintaining healthy capacity growth. E.U. airport traffic actually grew 1% during the first half of the year, according to Airports Council International. And members of the Association of European Airlines (AEA) saw RPK traffic up a robust 6% y/y during the half. As they say about statistics, however, torture them enough and they’ll say whatever you want them to say.

In reality, Europe’s airline sector is descending into darkness. Modest Q2 profits aside, Europe’s airlines remained thoroughly drenched in red ink year to date as they entered the summer. Of the 13 European airlines that reported first half results, 12 lost money at the operating level in the six months from January to June. The only exception was Ryanair, whose operating margin fell from 8% in last year’s first half to a very un-Ryanair-like 3% this year. Taken together, these 13 airlines lost a combined $1.6b net (excluding special items) in the six-month period, far worse than their loss ex items of about $600m in the first half of 2011. This prior year $600m loss, moreover, plus losses from the off-peak fourth quarter, was more than offset by a $2b-plus profit in the peak summer quarter last year, enabling seven of these 13 airlines to end 2011 with a full-year net profit—Air France/KLM, Alitalia, Finnair, Air Berlin, Norwegian and Aegean were the exceptions. To put it more succinctly, Europe’s airlines muddled through a difficult 2011 with modest success, only to fall flat on their faces in the first half of 2012.

But what about that positive traffic growth so far this year? That’s mostly because of the bounce back in Japan and the Middle East/North Africa region, both disrupted by demand shocks. There was some genuine growth in regions like Latin America too. But demand was also stimulated by lower fares linked to growth in capacity—too much growth in capacity. In stark contrast to the transformative downsizing undertaken by U.S. airlines, most major European airlines are still expanding. Some are doing so by densifying their seating configurations (Lufthansa, Air France, Finnair and SAS, for example). Some are migrating to larger planes (Lufthansa, Air France, easyJet). Air France is utilizing some of its narrowbodies more intensively, mimicking low-cost carriers. And low-cost carriers are themselves growing to take advantage of new opportunities as travelers look for bargains and rival airlines disappear.

Sure enough, European airlines are disappearing—Malev, Spanair, Cimber Sterling, Skyways, City Airline, Air Finland, WindJet, OLT Express, bmibaby and Czech Connect are no longer with us. But Europe’s airline sector nonetheless remains hopelessly fragmented, again in stark contrast to the consolidated U.S. landscape. Ryanair’s latest bid for Aer... (479 of 1,916 words)

Also Inside this Issue:

Now deep into the second half of 2012, the world’s economy is not well. Global GDP, in fact, is growing more slowly than it has at any time since the aftermath of the U.S. financial meltdown in 2009. Europe is struggling to deal with heavy debts and shrinking output. The U.S. job market remains weak, on the eve of scheduled tax hikes and government spending cuts that even a healthy economy would find hard to bear—the so-called “fiscal cliff” that might already be hurting demand. Emerging markets like China, India and Brazil are not growing like they once were. World trade is lagging, evident in slumping airfreight markets. And perhaps most disturbing of all for airlines: oil prices are not falling in response to all of this. Instead they’re rising, most likely due to tensions in the Middle East and a U.S. dollar weakened by expectations of still looser U.S. monetary policy.

Already, Europe’s airlines are showing lots of red ink. And first-half margins for carriers in markets like China, Latin America and Australia are well below what they were a year ago, let alone two years ago. This week, all eyes will be on two investor conferences in New York City, one hosted by Dahlman Rose and the other by Deutsche Bank, where U.S. airlines will give their first assessments of market conditions since presenting their Q2 earnings earlier this summer. Two weeks later, many will present at the Boyd Group International conference in Dallas, providing a further dose of data and color.

By then, American might know more about its post-bankruptcy fate—joined with US Airways perhaps, and maybe or maybe not with new pilot pay in place.

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