Analysis

Delta Air Lines enjoyed strong revenue growth during 2Q2012 as demand remained steady despite the negative macro economic headlines from Europe that continue to fuel global jitters. The carrier’s forward bookings for 3Q2012 indicate both corporate and leisure demand is holding steady despite underlying economic uncertainty. But as the carrier’s revenue performance continues to be strong, Delta is facing steady cost headwinds throughout the remainder of the year as a result of capacity cuts and product investments that the carrier assures will produce margin gains in the future.

Unfavourable settlements in its fuel hedging portfolio drove Delta to a 2Q2012 loss of USD168 million. Excluding special items that included the losses on fuel hedges and expenses associated with 2,000 employees opting to take early-out packages, Delta’s profit during the quarter was USD586 million, compared with a USD198 million profit in 2Q2011.

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.

Executives at Southwest Airlines are remaining cautious even as the carrier recorded a healthy 42% increase in 2Q2012 profits on a nearly 12% rise in revenue. But the carrier’s cost creep continued throughout the first six months of 2012, and Southwest warns of rising unit costs throughout the remainder of the year. The anticipated cost pressure coupled with uncertain domestic economic trends have led Southwest to remain subdued in its outlook even as demand and pricing continue to remain strong.

Southwest’s 2Q2012 performance was strong across all the key financial metrics as net income increased from USD161 million to USD228 million year-over-year. Operating revenues increased from USD4 billion to nearly USD5 billion, aided by a 5% rise in average fares to USD150. The carrier also reported a impressive 122% jump in operating income during 2Q2012 to USD407 million. Southwest’s performance during the quarter was a marked improvement from the USD18 million net loss and 90% drop in operating income the carrier recorded in 1Q2012.

Etihad Airways in 1H2012 reported another period of remarkable growth as revenue for the six months to 30-Jun-2012 rose 30% compared to 1H2011 to USD2.24 billion as the carrier increased capacity, added new destinations and improved its load factors. It did not disclose bottom-line profitability.

Six new aircraft were delivered in the six month period, including the carrier’s first three class Boeing 777-300ER. Etihad added services to Basra, Sahnghai Pudong and Nairobi in 1H2012. Lagos service was also launched on 01-Jul-2012.

With the new aircraft and expanded network, passenger numbers for the half year rose 30% to 4.89 million, while revenue passenger kilometres also rose 30%, reaching 22.73 billion. Capacity was up only 23%, to 29.5 billion available seat kilometres. With demand growth well ahead of capacity, passenger load factors rose 4.2ppt to 77.1%.

Qantas announced today that its international operation is expected to report an earnings before interest and tax (EBIT) loss of over AUD450 million in 2011/12. This compares with a loss of AUD216 million attributed to international in FY2010/11. Overall forecast for the year is steeply downgraded to AUD50-100 million. The larger international loss is largely a result of one-off restructuring costs pegged at AUD370-380 million.

According to the carrier, the “structural issues” in the business have been compounded by the impact of global economic factors – including increased fuel costs, the high Australian dollar and weakness in the UK and Europe market – as well as allocating a AUD100 million one-off cost to last year’s industrial action. 

Inbound traffic to Australia has softened in the past two months, causing yields to fall, and outbound premium traffic is showing some signs of weakness. But Qantas Group’s domestic business has boomed over the past year, with Tiger temporarily quietened and Virgin relaxing its pressure on the leisure end of the market.

Major European airports – some privatised, others in the public sector – have released financial results for 1Q2012 and in two cases for FY2011. Unlike the last time an across-the-board results survey was undertaken, in 2011, there is a greater degree of uncertainty in some countries in this first quarter that is reflected in these reports but there still remain more positive than negative results, especially in Scandinavia.

In spite of high oil prices and a Europe-wide economic recession Ryanair further distanced itself from its full service peers and reported a remarkable 25% increase in net profit for FY2011/12 to a record EUR503 million. Operating profit lifted 40% year-on-year to EUR683.2 million. Much to the annoyance and envy of Lufthansa and certainly Air France-KLM Group, which both recorded a deterioration of their financial performance in the most recent financial year, Ryanair improved its net margin by 1ppt to 12% and was able to maintain its operating margin at 14%. This is well above the EBIT margin performance of Europe’s full service carriers. Air France-KLM’s operating margin was negative in FY2011 while Lufthansa Group’s adjusted operating margin came in a 3% and IAG’s operating margin also reached a meagre 3%.

A combination of high oil prices, regional political instability, volatile exchange rates and Emirates’ exposure to the global economic situation has brought the carrier back towards its international peers. Emirates reported a net profit of AED1.5 billion (USD409 million) in FY2011-2012, a dramatic 72.1% drop on the previous year’s result.

Even with the stiff headwinds pushing against it during the year, the carrier continued undaunted with its growth strategy. In FY2011-2012, Emirates took delivery of 22 new widebody aircraft and added 11 new destinations – a record number of new routes for the airline in a single financial year. It flew 34 million passengers at an 80% passenger load factor and increased its overall passenger traffic (revenue passenger kilometres) by just under 10%. Emirates now connects 122 destinations on six continents from its hub in Dubai.

Overall, revenue at the airline reached AED61.5 billion (USD16.7 billion), an increase of 16.5% from the previous year. Passenger revenue climbed 18.2% year-on-year, to AED49 billion (USD13 billion) due to the overall expansion of passenger numbers and flying, as well as higher fares.

The outlook for the normally buoyant Asian market has further dimmed following a rare quarterly loss for Singapore Airlines (SIA). The SIA Group’s first net loss since the global economic crisis of 2008 could be seen partially as an indication of its weakening market position. But in reality it is probably more indicative of the broader challengers facing Asia’s full-service airline sector.

SIA has reported for the three months ending 31-Mar-2011 (4QFY2012) a group operating loss of SGD5 million (USD4 million) compared to an operating profit of SGD166 million (USD132 million) for the same period last year. The group’s net loss for 4QFY2012 came in at SGD38 million (USD30 million), compared to a profit of SGD171 million (USD136 million) the previous year. SIA was widely expected to report a decline in profits for the sixth consecutive quarter, but the small loss – the first since 2QFY2010 – came as an unpleasant surprise.

Incessantly high fuel costs and an unwelcome increase in employee expenditure, highlighting the urging need to restructure workforce productivity and pay, pushed Air France-KLM Group into a deeper loss for 1Q2012 despite a surprising rise in passenger unit revenue and buoyant passenger traffic. Operating loss for the first three months widened almost 50% from EUR403 million to EUR597 million in the year-ago period. Air France-KLM’s net loss remained flat at EUR368 million but benefitted from a one-off gain of EUR98 million relating to the sale of a stake in Amadeus.

Air France-KLM is not Europe’s only airline group to report worsening 1Q2012 results. Lufthansa Group, Europe’s largest airline group, has posted a EUR381 million operating loss for the first three months of 2012, compared to a EUR169 million operating loss posted in 1Q2011 and announced it will cut 3500 full-time jobs in administrative departments worldwide over the coming years as part of its SCORE programme. SAS Group also has reported a 1Q2012 net loss of SEK729 million (EUR82 million), doubling its 1Q2011 net deficit of SEK373 million (EUR42 million).