Europe Q1 results: Still feeling the recession chill

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Carriers hope to avoid potholes as they set off on the long journey down the road to recovery, writes Graham Dunn in London

While the improvement for the global airline sector in the final quarter of last year continued during the first three months of 2010, those in Europe still find themselves in an uneasy position. The traditionally quieter three months to March remain littered in red ink, traffic is recovering only slowly and the financial markets remain jittery amid concerns the woes in the Greek economy could spread to other parts of the eurozone. With this backdrop, Europe needed the five-day closure of its airspace due to volcanic ash like a hole in the head.

The first quarter did see a pick-up in traffic for European carriers over the same period last year. IATA data for the first three months of 2010 shows a 4.3% increase in passenger traffic and 6% growth for March. But this lags the growth seen in all other regions; Africa, Asia and the Middle East all enjoying double-digit growth over the same period. "This is the result of sluggish home economies and continuing high unemployment rates," says IATA. Likewise, Europe trails other regions in the pace of the cargo recovery. European freight traffic is running 10% higher over the first three months, but this compares with growth of at least 30% across the other regions.

While traffic is only slowly increasing, European carriers have continued to keep a tight grip on capacity as they bid to improve load factor and yields. Capacity for the first three months is fractionally lower than the same stage last year.

CHALLENGES AHEAD

The challenges that remain, especially within the passenger segment, are clearly illustrated in Lufthansa first quarter results. Group operating losses widened to €330 million ($417 million), reflecting a number of issues, such as the first-time inclusion of its acquisitions Austrian Airlines and bmi, together with an earlier pilots dispute. But it also demonstrates the continued tough climate. "A recovery in demand is not enough to secure a good result; cost efficiency and increasing revenues even further are also absolute musts," says Lufthansa chief financial officer Stephen Gemkow. He did, though, add the year to date has "further strengthened" its expectations of improving its full-year operating profit.

Other carriers which have so far reported results for January to March, such as low-cost carriers easyJet and Vueling, similarly expect to post an improvement in profits for the full year. "We have been very pleased with our yield performance during the recession. We think the same factors that helped our yield performance during the recession will also help in the recovery stage," says outgoing easyJet chief executive Andy Harrison. That said, the carrier has scaled back its full-year profit growth forecast in light of an expected £50-75 million ($73-100 million) hit incurred as a result of the closure of European airspace due to volcanic ash.

Other European carriers have similarly outlined their initial expectations of the cost from the ash cloud disruption; SAS estimating around $85-90 million, Finnair $20 million and Norwegian $16 million. But carriers see no long-term damage on booking trends as a result. "We see no impact on our booking momentum in terms of volcanic ash," says easyJet's Harrison.