Retrenching and cautious capacity from many players in Europe contributed to relatively small 1.8% revenue growth in 2012, the slowest rise of all regions
The mood at the recent IATA annual general meeting in Cape Town reflected growing confidence that despite everything thrown at this industry, it can still make money. Indeed, IATA projects the sector will make more money in 2013.
The latest Airline Business World Airline Rankings illustrates just how bad it did not get in 2012. Traffic and revenues improved, not at stellar rates but steadily enough. And while the profit picture is mixed by region, business model and even within carriers, headline profitability was roughly unchanged. That may not sound anything to get too excited about, but the ability to make money with fuel prices high and key economies struggling is not to be underestimated.
This year's World Airline Rankings show revenues among the leading 150 carriers at just shy of $700 billion, up by around $30 billion for the same period last year. Operating profits for those of the leading 150 airlines, where figures were available, increased slightly to more than $20 billion.
However, the fact that net profits remained much lower - and indeed slipped by almost a billion to under $4 billion for the year - illustrates the extent to which restructuring continues to take place in the industry.
"The new [economic] norm applies to the USA and Europe. When you get outside of these areas - in Asia, Middle East, Africa and Latin America - the markets are still growing. Maybe not quite as fast as recently, but still at five to 10%. Those are not small growth rates," notes Roger de Peyrecave, partner at PwC.
"For Europe and the US carriers, the new norm means you can't stay still. You need more detailed analysis of the individual profitability of each route and flight. That's not easy. You usually find it out after you've made money or lost it; getting much more real-time information to get predictive information is harder. That's the nirvana for airlines, but we know some are getting it."
Nowhere have carriers had to deal with the new norm more than in Europe. Here, restructuring continues against the backdrop of stagnant European economies.
But financials for the region have not been grim as might have been feared. Figures for more than 40 European carriers featured among the 150 leading carriers by revenue are all but unchanged. Revenue grew slightly - up nearly $4 billion to $193 billion - representing growth of around 2%. The carriers mustered operating profits of nearly $3 billion between them, while slipping into a loss at a net level.
"One of the biggest things you've got is the GDP conundrum. What you can achieve in [terms of] growth is by getting costs down and discounting fares," says Peter Morris, chief economist at Flightglobal consultancy Ascend. "But just like the idea that everything rises with the tide. So when the tide is pretty much flat and they want to add more boats, it starts getting pretty crowded."
While on the face of it, it seems European carriers have been holding ground, a closer look illustrates the changes taking place. Revenue and profit figures show the extent to which ground is being made up by the low-cost carriers and operators from Europe's emerging economies, Russia and Turkey. It is telling that after the big three European players; Lufthansa, Air France-KLM and IAG, budget giants Ryanair and EasyJet, as well as emerging pair Aeroflot and Turkish Airlines., are among the five next biggest by revenue.
Compare this to 10 years ago when none of the 10 leading European carriers by revenue were from the budget or emerging economies sector. While Aeroflot and Ryanair revenues have grown six and eight-fold respectively since then, they have stayed flat or shrunk at Alitalia and SAS which are now nestled behind them in Europe's top 10.
Leading European airline groups: 2002 v 2012
Notes: Based on 2002 and 2012 Airline Business World Airline Rankings. Rank is position in global top 150 by revenue. Lufthansa 2012 figures include Austrian and Swiss, Air France-KLM 2012 figure include KLM, IAG 2012 figures include Iberia
The story is repeated across the rest of the rankings as the likes of UTAir, Transaero and Pegasus in Russia and Turkey, and low-cost sector operators like Norwegian and Vueling grow at double-digit rates.
Neither does the growth of low-cost carriers appear to be just market share play. Lufthansa is the only one of Europe's traditional carriers to appear in the list of leading carriers by operating profits - and has a far lower operating margin given the size of the group's business. At the other end of the scale, Ryanair led the way in profits last year, while EasyJet lay not far behind.
"The traditional airline business model says you can't make 15% operating margin. They [the likes of EasyJet and Ryanair] have not accepted the rules of the game. They have challenged everything," says Morris.
Network carriers, of course, have not stood still, particularly on short-haul. Air France-KLM, IAG and Lufthansa have all taken a fresh approach with Hop, Iberia Express and Germanwings on the table. The moves have been greeted with typical cynicism from within the low-cost world. "Lower-case lettering: all the engineers in Frankfurt think that that's what a low-fare airline looks like," quips Ryanair chief executive Michael O'Leary about the Germanwings branding.
"The competitive environment continues to evolve with legacy carriers looking to restructure, to offset their continued short-haul losses and weaker carriers that are retrenching and cutting capacity. EasyJet remains well-positioned to deliver in this environment," said the carrier's chief executive Carolyn McCall during a recent results conference call.
It is the retrenchment seen among network carriers and the continuing efforts to find a role for second tier operators in Europe which convince low-cost carriers of the opportunity of continued long-term growth.
It means the search is on for many of Europe's smaller carriers for long-term investors or a new model. Czech Airlines has found a suitor in Korean Air, Serbian operator JAT Airways may be about to join the Etihad camp, and some, like Aer Lingus, Air Baltic and Air Malta, are seeing traction in their recovery strategies. However, around the continent there remains many sick carriers and undoubtedly not all will survive.
"In Europe there has been consolidation, but there's still a heck of a lot of airlines there," PwC's de Peyrecave says: "I think there will be more of a shake-out, particular in the short-haul market in Europe."
Low-cost carriers are backing their confidence that this shake-out will provide them opportunities to grow with a series of high-profile orders. Norwegian's eye-catching 200-strong aircraft order from last year has been followed by more recent commitments from EasyJet, Pegasus and Ryanair. IAG-owned Vueling will finalise an order of its own shortly.
Not that low-cost carriers have it all their own way. Jonathan Root, senior credit officer at Moody's Investors Service, believes the slow economic recovery will continue to "impede the efforts" of low-cost carriers such as Ryanair and EasyJet to improve their profit margins. However, larger carriers such as Lufthansa and IAG's British Airways should see their operating profits grow this year, he says.
The substantial rise in share price of Air France-KLM, IAG and Lufthansa over the last year also points to improved market confident in the network carrier model.
But Ascend's Morris argues the sustainability of airlines or their models is just part of evolution. "The business model and supply side is changing," he says. "There is no solution to evolution. The better ones [airlines] do best. It's not even fair, there is no best model, just better things that better fit the market environment."