ANALYSIS: Restructuring costs deepen European Q1 losses

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For Europe's major network carriers the first quarter offered a reminder of the hard work still to be done.

Air France-KLM, Lufthansa and parent of British Airways and Iberia, International Airlines Group, all saw net losses deepen in the traditionally difficult first quarter - in part exacerbated by restructuring costs incurred as a part of efforts to tackle these losses.

This contributed to a deepening of more than $1 billion in collective net losses to $2.6 billion among European carriers during the traditional tough quarter.

Collective operating losses also topped $2 billion while first quarter revenues were only 1% higher.

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Though Lufthansa kept operating losses unchanged in the first quarter, net losses rose 16% to €459 million ($596 million). The carrier cities "impairment losses and other valuations as of the reporting date" for the deteriorating net result.

Lufthansa slashed capacity by withdrawing four Airbus A340-300s, eight Boeing 737s and four Bombardier CRJ700 regional jets from its fleet. This increased impairment losses to €75 million. Profits were also hit by restructuring costs of €64 million related to its Score efficiency programme.

Lufthansa remains confident that the restructuring work will pay dividend. It expects its 2013 operating profit to exceed the 2012 figure of €524 million.

Air France-KLM made small inroads into its first quarter operating loss. However, its net losses deepened more than five-fold to €276 million, as foreign exchange and hedging changes hit its other financial income. "We are facing a very tough economic context" says chief financial officer Philipe Calavia - but he adds that the group "will remain focused on the implementation, in time, of our cost-cutting measures".

The carrier says it will review its restructuring programme after the summer, and may make further cuts. Calavia says it will look to address whether "we are 100% in line with our objectives - do we need to reinforce savings in some areas which are not performing as well as expected?"

Air France's incoming chief executive Alexandre de Juniac, who will replace Jean-Cyril Spinetta as group chief in July, has already indicated changes will be made to Air France's regional bases in September, after a review of operations is complete.

IAG, meanwhile, turned in a wider operating loss of €278 million for the three months, again largely driven by losses at Iberia. The latter racked up operating losses of €202 million, while costs relating to its restructuring drove a €311 million exceptional charge it took in the quarter. This largely stemmed from an agreement - proposed by a mediator at the end of March - which ended strike action at the carrier over proposed cuts, but which increased redundancy costs.

The mediator's proposals allow for up to 3,300 jobs - about 17% of the Spanish carrier's workforce - to be axed, alongside an average salary cut of 11%. It also makes provisions for a further 4% to be cut in the absence of a productivity deal. As no agreement has yet been struck, Iberia has implemented the cut.

Around 1,400 staff will have left by the end of May under the scheme, with that figure rising to 80% of 3,300 by year-end.

The savings already delivered are filtering through into expectations of improving on last year's €351 million full-year operating loss. "The initial savings we are counting on are 3% unit labour cost reductions for this year for Iberia," says International Airlines Group CFO Enrique Dupuy. "We will be seeing for 2013 a substantial material reduction in the level of Iberia losses in comparison with last year."

Iberia will cut its capacity by 14% this year - driving an almost -2% total IAG group reduction in capacity for the year. "Naturally, with a reduction in capacity of 14/15%, and with the discipline you are seeing in the market, you will expect to improve unit revenues," says IAG chief executive Willie Walsh.

"Cost changes are a step in the right direction - but there is a gap, and a gap that can be closed by revenue improvement," he says.

Newly appointed Iberia chief executive Luis Gallego - brought in off the back of his successful launch of Iberia Express - has put a new management team in place, to reflect a shift in the commercial focus at Iberia. "We've changed the commercial leadership in Iberia, and they are much more focused on revenue where it is profitable, rather than market share," says Walsh.

There was steadier progress among low-cost carriers. Norwegian turned an operating profit in the first quarter while EasyJet nearly halved its pre-tax losses for the six months ending March. Unit revenues continue to improve, reflecting its sharper focus on yield management and route management.

EasyJet also highlights the impact of reduced competitor capacity on the routes it serves for the improved yield picture. "In the last 12 months we have seen a move to more rational behaviour in the industry similar to the trends seen in the US over the past five years," shes says.

The capacity point is also one picked up by IAG's Walsh. He is encouraged by the improved capacity discipline being seen in lots of markets in Europe, and sees this evident in Spain given its economic difficulties. "If you look at the Spanish market, both Ryanair and EasyJet have cut back capacity significantly and we have cut back capacity," he says. "You are not seeing anyone trying to fill the capacity reduction there. People are much more focused on unit revenue and yield - then capacity and market share - than they had been."

Similarly IAG enjoyed a 7% rise in transatlantic unit revenues. "I think capacity discipline on the transatlantic has been on the most positive features we've seen in the last 24 months," says Walsh.