ANALYSIS: Weak euro and high fuel prices hit European airline profits

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European carriers endured a torrid second quarter of the year as the difficulties facing them - notably the sovereign debt crisis and high fuel prices - continued to take a heavy toll on their profits.

The operating losses made by the legacy carriers make for grim reading. IAG lost €253 million ($314 million) in the first half, Lufthansa €20 million and, worst of all, Air France-KLM posted an eye-watering loss of €945 million.

While the legacy carriers, the most dependent on falling volumes of business traffic, were expected to struggle, even the previously resilient low-cost sector suffered. Ryanair reported a first quarter year-on-year drop in profit of 29% to €99 million.

The pain from fuel costs was felt across the industry, made worse by the euro-dollar exchange rate. Peter Morris, chief economist of Flightglobal's data and consultancy division, Ascend, says: "Three or four years ago, the euro-based economies were insulated against dollar-priced oil because of the devaluation of the dollar against the euro, but now it's working the other way."

IAG, for instance, saw fuel costs rose by 25% to €2.9 billion for the half-year against the same period last year. But IAG's issues run much deeper than fuel prices according to CTAIRA's head of consultancy, Chris Tarry. While British Airways recorded an operating profit, after exceptional items, of €13 million in the period, Iberia made an operating loss of €263 million. The Spanish flag-carrier is struggling against the country's economic headwinds, rising airport operating charges and "deep and structural" problems, according to chief executive Willie Walsh.

Tarry says: "When you look at Iberia, you are in an economy which is in a shocking state and you have an airline which needs to be significantly smaller than it is."

The airline's recent performance means its restructuring must go deeper than originally foreseen, but Tarry feels there are also issues to be addressed at group level. "From the point of view of merger economics there has been no tangible or discernible benefit from the merger of BA and Iberia. We've talked about recognising synergies, but from the outside you can't see that," he says.

Air France-KLM is going through the pain of its own restructuring process at the moment and booked a one-off provision of €368 million in the second quarter results to cover voluntary redundancies at Air France. There may be worse to come too as it battles the unions to reshape its short- and medium-haul business. Losses on fuel hedging - caused by a 6% fuel price fall over the quarter - hardly helped, adding another €372 million of losses to its balance sheet. Ryanair too had issues with hedging, recording a year-on-year increase in fuel expenditure of €117 million in its first quarter to €544 million. Its average fuel price grew by 21% year-on-year.

But with the entire sector subject to higher cost bases than the previous year and weaker levels of holiday travel, Morris says that Ryanair's results cannot be called disappointing "as some commentators described it". He says that in such a climate "the core fundamental is that you have got your nose above the water".

At Lufthansa Group it was a familiar story. It generated an operating loss of €20 million during the first six months of 2012 against a €114 million operating profit during the same period last year. However, the company's net loss was cut from €206 million in H1 2011 to €168 million this half. Revenue increased 6% to €14.5 billion, but profitability came under pressure from increased fuel costs, "sustained" price pressure, air passenger taxes in Germany and Austria, and the European Union's Emissions Trading System, the airline says.

However there were success stories among the gloom. Spanish low-cost carrier Vueling more than doubled its profit in the second quarter to €7.7 million after boosting capacity by 21% aided by the demise of rival Spanair earlier this year. Norwegian Air Shuttle posted a 69% increase in net profit to NKr90.5 million ($15.1 million) for the second quarter of 2012. Based outside the eurozone, the Scandinavian carrier enjoyed a 1% year-on-year decline in average dollar spot prices for jet fuel in the second quarter, but a fuel hedging loss of NKr13 million contributed to higher per-tonne expenses.

And in Ireland, Aer Lingus - again embroiled in a takeover battle with Ryanair - pointed to a strong performance in higher yielding and long-haul traffic as key to it cutting operating losses to €4.4 million in the first half. It marks an improvement on the €26.8 million lost at the same stage last year. "Most of the improvement has been on the revenue side," says a spokesman for the Irish carrier, pointing to a 10% jump in first half revenues €626 million.

Note: Results are for airline groups including non-aviation businesses. All figures are in US dollars exchanged at average rate for period.
All changes given in local currency terms or at constant current rates.      
Aer Lingus Net result is before tax.