Analysis for Europe/MEA
Philippine Airlines (PAL) has emerged as one of the most aggressive competitors on the kangaroo route between Sydney and London since rescheduling some of its Sydney flights in late 2015 to connect with London. PAL could potentially further increase its market share in the highly competitive Australia-Europe market in 2018 as it adds more flights to Australia and launches a second European destination.
Airline safety videos used to be boring. Very boring. Wooden flight attendants pointing out how to fasten a seatbelt or explaining where the emergency exits are may have ticked all the regulation boxes, but they left most travellers reading their newspapers.
That’s all changing. No-one reads newspapers (what’s a newspaper?) – and lots of people watch the safety videos.
Although it happened on the other side of the world, the potential change this weekend’s partnering agreement between Lufthansa and Etihad will have for Australia and New Zealand can’t be understated.
As in the rest of Europe, the airline industry in the continent’s Nordic region is undergoing a structural change characterised by bankruptcies and intense competition from low-cost carriers with full-service network airlines implementing cost reduction programmes aimed at securing long-term sustainability or just survival. The region saw yet another operator cease operations in 2Q2012, Air Finland, following on the bankruptcy of Cimber Sterling, Skyways and City Airline in the first three months of the year.
Finnair made outstanding progress in 2Q2012 to lower its cost base and heighten revenue although it could not attain profitability while SAS Group’s pre-tax earnings halved year-on-year to SEK371 million (EUR45.1 million ) despite a one-off SEK346 million (EUR42.1 million) capital gain attributable to property transactions. Norwegian Air Shuttle improved in all operating parameters in the three months ending 30-Jun-2012 and reported a consolidated net profit of NOK90.5 million (EUR12.4 million), up 69% over the year-ago period. The LCC’s operating profit expanded to NOK322.3 million (EUR44.3 million) from NOK72.8 million (EUR10 million) in the year-ago period, and 2Q2012 EBIT margin was a respectable 10.2%.
Two major elements driving Air Canada’s 2Q2012 negative financial results – labour strife and pressure created by the sudden shutdown of its major maintenance provider Aveos – are the areas where the carrier sees prime opportunities in the future as new labour agreements allow for the creation of a new low cost carrier and negotiations with new suppliers ensure a substantial improvement in the costs of airframe maintenance.
Air Canada management during the last year has often cited the transformation that needs to occur at the carrier in order for the airline to compete in the new competitive environment ushered in by LCCs and spiking fuel prices. But in the short term the company still must deal with disgruntled employees and increasing competitive pressure that will not pause as Air Canada works to complete its transformation.
During 2Q2012 Air Canada widened its losses year-over-year by CAD50 million (USD50.2 million) to CAD96 million (USD96.4 million), while net losses for 1H2012 expanded by CAD241 million (USD242 million) to CAD306 million (USD307 million).
International Airlines Group (IAG) is drafting a comprehensive restructuring plan for Iberia that will include short-term downsizing, network reshaping to deliver higher unit revenues and a re-evaluation of all aspects of the business. Job cuts will be an inevitable consequence of the overhaul. Efforts to address the Spanish carrier’s uncompetitive cost structure are not new and date from before the merger with British Airways (BA) in Jan-2011, but results have been insufficient and losses are spiraling out of control as the economic crisis in Spain worsens and the onslaught of LCCs persists.
While Iberia’s pilots continue to fight change other legacy carriers are restructuring and this is threatening Iberia’s leadership position in the Europe-Latin American market. The doubling of the departure taxes at Iberia’s main Madrid and Barcelona bases since 01-Jul-2012 is putting salt on the wound and diminishing the airline’s appeal.
Europe’s largest airline group has decided to further revise full-year capacity growth downwards to 0.5% and rigorously pursue its SCORE restructuring programme to protect yield and combat the dire operating environment marked by economic uncertainties in Europe, a night-flight ban at its main hub in Frankfurt, increased air traffic taxes and above all high fuel prices. Lufthansa Group’s decision follows an unsatisfactory performance in 1H2012 in its passenger airline business segment, which recorded an operating loss of EUR179 million, widening the EUR100 million operating loss recorded in the year-ago period despite a 7.2% increase in revenue to EUR11.2 billion.
The Group’s airlines recorded diverging results and highlights the need to cut costs at its largest unit Lufthansa while simultaneously increasing synergies between the different airlines. Lufthansa German Airlines amassed a 1H2012 operating loss of EUR300 million (nearly double the EUR146 million operating deficit reported 1H2011) while SWISS and Austrian Airlines earned EUR48 million and EUR26 million, respectively. Austrian’s operating performance reflects the ruthless restructuring implemented by CEO Jaan Albrecht and the noteworthy turnaround is in contrast to the declining performance of Lufthansa Group’s long-standing star SWISS.
Dublin-based Ryanair recorded a near 30% fall in earnings for the three months ending 30-Jun-2012 in spite of a 6% rise in passenger numbers and a 4% increase in average fares. Net profit for its fiscal first quarter came in at EUR99 million compared to EUR139 million in the year-ago period as revenues rose 11%. But the airline's total operating expenses grew at a higher rate of 17% primarily due to sharply higher fuel costs.
Ryanair’s decrease in net profit was in line with its own guidance, but below consensus forecasts of EUR114 million. Despite the fall in earnings during its fiscal first quarter the carrier is maintaining its full-year outlook and expects to earn between EUR400 million and EUR440 million for its fiscal year ending 31-Mar-2013 as continuing austerity measures, recession in Europe and lower yields at new bases will restrain fare growth. It anticipates growing passenger numbers by 5% to 79 million. Europe’s largest LCC in terms of passengers posted a net profit of EUR503 million in FY2012 and EUR403 million in FY2011.
In spite of growing its passenger revenues nearly 7%, Air France-KLM Group saw its 2Q2012 net loss widen year-over-year as a result of provisions for restructuring and a drop in the value of fuel hedging contracts. The Franco-Dutch group recorded a deficit of EUR895 million for the three months ending 30-Jun-2012, more than quadruple of the EUR197 million net loss accrued in the year-ago period.
Air France-KLM took a special charge of EUR368 million related to its Transform 2015 restructuring programme, principally to fund a voluntary redundancy plan announced at Air France in Jun-2012. It also took a EUR372 million accounting charge related to the hedging of fuel prices. Excluding these non-cash items the Group’s net loss for 2Q2012 would be “by no means abnormal”, Air France-KLM Group CFO Philippe Calavia noted during a discussion of the company's results.
easyJet beat the continuous run of disappointing economic data in Europe and has lifted its full-year pre-tax profit guidance after recording a strong performance for the three months ending 30-Jun-2012. Europe’s second largest LCC in terms of passenger numbers now expects to report a profit before tax of between GBP280 million and GBP300 million for its fiscal year ending 30-Sep-2012, above analyst estimates and above the company’s reported pre-tax profit of GBP248 million in FY2011 and GBP154 million in FY2010.
easyJet’s revenues in 3QFY2012 (three months ending 30-Jun-2012) rose 11% year-over-year to GBP1 billion as passenger numbers increased 11% to 16 million and total revenue per seat grew 2.8%. The airline increased the number of seats flown year-on-year by 7.5% to 17.9 million and load factor improved 2.8ppt to 89%. The solid operating performance was coupled with a 3% reduction of cost per seat excluding fuel and follows an enhanced operating and financial performance in its typically weak 1HFY2012.