Airline Weekly - September 5, 2011
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Airline Weekly - September 5, 2011

Three Falling: Lufthansa, Air France/KLM and BA/Iberia complete a first half they’d rather forget

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Cover Story

Three Falling: Lufthansa, Air France/KLM and BA/Iberia complete a first half they’d rather forget

How do you run an airline when your fuel costs spike, your governments levy punishing taxes, your unions are restless, your home market is in a debt crisis and two of your most important overseas markets suffer severe disruptions? Ask Europe’s Big Three.

It ain’t easy being Lufthansa, Air France/KLM or BA/Iberia. Not these days. Indeed, the Big Three collectively lost money at both the operating and net levels during the first half of this year, performing considerably worse than their Big Four counterparts in the U.S., even including badly struggling American, whose debt-soaked net results were particularly woeful. For the second quarter alone, Europe’s relative underperformance was more pronounced still, further evidence of a transatlantic flip—pre-recession, Europe’s Big Three were much healthier than their U.S. peers.

Granted, the Big Three collectively did better during this year’s first half than last, but only because last year’s figures were depressed by the infamous Icelandic ash cloud disruption. Otherwise, the results were worse, even with big help from a weaker U.S. dollar this year, which limited fuel cost inflation. Fuel hedges too, saved $367m for Lufthansa, $239m for BA/Iberia and $135m for Air France/KLM in the second quarter alone.

But all three airlines were heavily exposed to the sudden and sustained decline in demand from, and especially to, Japan. They also faced severe demand disruptions in the nearby Middle East and North Africa, not to mention yield erosion within Europe itself as airlines redeployed Mideast capacity to markets like Spain, Italy and Greece. For BA/Iberia and Lufthansa, taxes were an additional headwind—in the U.K., the reviled air passenger duty rose again, while in Germany, a new aviation tax took effect this year, albeit one that exempts connecting traffic.

Still, it’s Air France/KLM—some gains from fliers fleeing U.K. and German taxes notwithstanding—that’s struggling most. One big if simple reason is those inferior hedge gains. Another is its greater exposure to political disruptions in former French colonies like Tunisia, Syria and the Ivory Coast. It also has the most exposure to Japan if you include equity partner Alitalia (5.6% of total ASKs at the time of the earthquake, slightly above Lufthansa’s 5.4% figure, including Swiss and Austrian). Losses at its Transavia and cargo units, along with a shorthaul assault by easyJet and Vueling, also contributed to Air France/KLM’s first-half woes, which... (405 of 1,622 words)

Also Inside this Issue:

This week marks 10 years since the terrorist attacks of Sept. 11, 2001, the most disruptive demand shock in the history of the airline industry. Traffic took years to recover, numerous carriers were pushed into bankruptcy and airport security would never be the same. Today, carriers are dealing with different challenges: demand weakness stemming from sluggish economies and viciously high fuel prices, which ultimately proved the most debilitating plague of the past ten years. Mergers, alliances, capacity cutting, cost cutting, new technologies and ancillary selling have only partly alleviated the pain.

Not all regions fared the same, of course. U.S. airlines suffered a lost decade as fuel inflation obliterated any hope of domestic traffic growth. But while America withers when oil prices are high, regions like the Middle East tend to flourish, fueling a stunningly successful decade for airlines like Emirates. Emerging Asia, too, produced big winners like AirAsia.

In the here and now, airlines enter the fall with some major developments on the horizon. The first B787 will enter service, for example, and new low-cost ventures are developing throughout East Asia. A newly re-engined B737 is ready to take orders. And alliances and joint ventures are poised to deepen.

U.S. carriers, contemplating the lessons of 9/11, discovered again how a sudden demand shock can wash away years of hard work—a hurricane hitting America’s northeast forced more than 12,000 flight cancellations. It will surely be a topic as carriers present at an investor conference in New York this week.

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