ANALYSIS: European carriers make slow inroads on winter losses

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European carriers made some inroads on cutting winter losses as the financial performance for the region’s biggest carriers during the traditional loss-making three months from January to March ended showed less red ink.

Collective first-quarter figures for eight European airline groups showed operating losses cut from $2.35 billion for the first three months of this year to $1.69 billion. Collective net losses over the same period were reduced more than $700 million to just under $2 billion. As the busy Easter travel period fell in April this year as opposed to March in 2013, some of the revenue gains have also been pushed into the second quarter.

There were differing fortunes among Europe’s big-three airline groups. British Airways and Iberia parent IAG cut its loss to roughly a quarter of the level a year ago, while Lufthansa Group almost halved its net loss. Air France-KLM, while shaving $120 million off its operating loss, made little progress on cutting net losses.

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The improved performance at IAG reflects lower unit cost across all its carriers and prompted the group to lift its full-year operating profit target by around €500 million ($695 million). Iberia’s operating loss was nearly halved to €111 million, and BA’s virtually wiped out, during the first quarter.

“Passenger unit revenues and total unit costs... are underlying the significant improvement in the operating results,” says IAG finance chief Enrique Dupuy. While revenues were roughly flat in the first quarter, unit costs excluding fuel were cut 4.6%. “We think it’s a very substantial improvement and has been happening across the three operating companies,” says Dupuy.

Following the strong first quarter, the group says it expects to lift full-year operating profit by €500 million from the €770 million it made in 2013. “This will again be based on a unit revenue flattish pattern and efficient growth which will have a positive impact on unit cost excluding fuel, which will be coming down,” Dupuy adds.

The improvement at Iberia and recent productivity deals with unions will help the restructuring Spanish carrier return to growth. Iberia is increasing capacity 3.3% in the three months ending 30 June – its first quarter of growth since the cuts – and by 4.6% across the full year. “There clearly is a short-term opportunity to repair some of the network changes that we made. If you go back to the capacity changes we made at the time, they were pretty blunt because we needed to take very quick action to reduce capacity,” says IAG chief executive WIllie Walsh.

Lufthansa chief financial officer Simon Menne described its first-quarter results as a “sound performance” in difficult market conditions after cutting operating losses nearly a third to €245 million. “We have improved our cost structures, and have taken various actions to enhance the quality of our revenues,” she says.

The Star Alliance carrier reiterated its existing target to deliver an operating profit between €1.3 and €1.5 billion this year. It did, though, note a three-day pilot strike in April and walkouts by German airport ground staff in March that generated a combined loss of “more than €70 million”.

Air France-KLM cut its operating loss 16% to €445 million in the first quarter, but its net loss was cut only 5% to €608 million. While the SkyTeam carrier says delivery of its Transform 2015 plan is “fully on track”, it does say the general operating environment remains tough: “Under these conditions, the group remains committed to its objective of an EBITDA in the region of €2.5 billion in full-year 2014, subject to the successful implementation of the measures aimed at compensating for the slower than expected recovery in cargo demand… and no reversal in other operating trends.”

While cargo operating losses were cut a third to €34 million through a 5.4% unit cost reduction, Air France-KLM is evaluating “further scenarios… to restructure the full-freighter business in order to accelerate the turnaround” as the “recovery of cargo demand is taking longer than expected”, the airline says.

Elsewhere, troubled Air Berlin, having recently disclosed the scale of full-year losses, trimmed its operating loss 3% to €183 million in the first quarter. The airline has embarked on a major recapitalisation to provide a “significantly more robust financial structure” that gives Air Berlin “room to concentrate” on its operations and restructuring programme, says finance chief Ulf Huttmeyer.

The airline has also recruited AlixPartners and PwC’s consultancy arm “Strategy&” as advisors for the planned restructuring programme following the recapitalisation. Huttmeyer says there is “no doubt” the airline needs to undergo “fundamental change”. The airline though does say its existing Turbine cost-cutting programme – aimed at raising the operating result by €400 million by year-end – has “clearly demonstrated tangible effects”.

Among Europe’s low-cost carriers, Vueling was able to keep its first-quarter loss roughly unchanged during its rapid expansion, while EasyJet was able to trim its loss for the winter period. Ryanair, which amid the weak demand picture in the winter, has embarked on a move to improve lift load factors and increase business traffic, ended its full year to March 2014 with net profit slipping 8%.

“Almost every carrier I can think of reported weaker winter numbers, either fares not rising or falling, so I don’t think it was particular to Ryanair," says Ryanair finance chief Howard Millar. “I would say it did spur us on [to change]. But we had been looking at what some of our competitors had been doing in customer service experience.”