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Aviation History
1995
1995 - 1939.PDF
BUSINESS fire, which came close to crippling them hoth in the fight to transplant the fast-turnaround, low- cost concept to the east coast. Continental's unceremonious dumping of its Lite operation has eased the pressure on its competitors (even Southwest welcomed the move). It has also freed Continental to focus on the hub-and- spoke operations it knows best. EUROPEAN COST-CUTTING While the US recovery begins to take shape, Europe's airline industry certainly had a better year in 1994. The Association of European Airlines (AEA), which represents all of the region's flag carriers, says that it is still too close to call whether the industry returned an operating profit. The final figure is hanging some where close to break-even. Whichever way it falls, the result rep resents a small triumph, given losses of $7.5 billion so far in the 1990s. The AEA cautions, however, that it was exceptional traffic growth, rather than a more fundamental improve ment in costs or productivity, which produced the turnaround. As the passengers returned in droves, especially on routes within Europe, international traffic grew by a heady 9.3%, one of the best increases in more than two decades. At the same time, capacity rose by a more gentle 5.3%, with a net increase of around 66 new aircraft. The result was a three- point leap in load factors, to 68.8%, the high est figure ever recorded by the AEA. The exceptional load factor was responsible for around 80% of the profits improvement, the AEA estimates. By contrast, the improve ment in the cost:yield equation added a paltry $55 million to the bottom line. The AEA sagely points out that, if the industry cannot turn a profit with aircraft fuller than they have ever been, then there is little option but to cut costs or raise yields. Although yields did in fact recover by an encouraging 3% in 1994, helped by a pick-up on the North Atlantic, there is no pretence that the long-term holds anything other than a continued decline. So cost-cutting it is. The industry need look no further than British Airways to see the results. The airline has consistently achieved annual cost-saving targets of more than $200 million and sees no reason why it should not continue. "We're now confident that we have a culture in the company where managers are expected to improve their costs. I see no reason why we cannot go on targeting a reduction in output costs," says managing director Bob Ayling, answering the question of when the cost-cut ting will stop. He points out that BA has shaved more than Singapore Airlines: hampered by strong domestic currency $1 billion from its cost base since 1991. Ayling adds that savings made the difference in 1994/5 of BA reporting record profits of $700 million (excluding the write-down on its USAir holding) instead of a loss of more than $400 million. Competitors have already taken note. Lufthansa, now free of state control, has begun to forge ahead with an onslaught on costs, including the setting up of its low-cost Express service. Others, such as KLM, are also reaping the benefits from early action on dri ving up productivity and efficiency. Analysts are waiting for the profits to start rolling in. Even the state-owned carriers of southern Europe are now tackling the issue head-on. The European Commission (EC) has any way made such restructuring a condition for the latest round of state-aid flowing into the airlines. Iberia, which is still awaiting an EC deci sion, has embarked on an aggressive three- year restructuring designed to return to profit, including the promise to slash the workforce by 14%.The Spanish carrier has already agreed a wage-freeze with its staff. Olympic Airways in Greece, long ranked among the region's laggards, is also showing more earnest restructuring efforts under new chairman Rigas Doganis. The latest pro nouncement out of Athens is that the airline is heading back towards its first profit in a decade, having slashed losses by nearly two- thirds in the first quarter of 1995. Despite a new realism among airline man- e agements, European carriers continue to face an uphill struggle on cost con tainment. Efforts to improve the region's expensive and inefficient infra structure are slow, while political and cultural hurdles remain in addressing staffing issues. Witness the recent embarrassing strikes at KLM and SAS, as well as the running battle still bog ging down Alitalia. ASIA TAKES HEED Despite world-beating traffic growth and a traditionally low-cost base, the realities of the cost equation are also catching up with the carriers of the Asia-Pacific region. The three big Japanese carriers have already been humbled by heavy losses, finding themselves overextended in the face of deeply depressed markets both at home and abroad. Restructuring measures are now in their third year and should put the industry back into profit for 1995/6. Elsewhere, Singapore Airlines and Cathay Pacific have led with warnings of falling yields and rising costs, not helped by domestic cur rencies, which are steadily strengthening. An increase in international competition and strong capacity growth are common themes. Malaysian Airlines and Thai Airways have managed to re-instate earnings over the last year, but only after an unnerving dip, while China Airlines has suffered this year, and may be casting an anxious eye over its shoulder at Taiwan's other rising stars. Strong traffic demand and region's low- costs should help offset some of the concerns, but the carriers of Asia-Pacific might do well to learn the lessons of Europe and the USA, that battles for market share are no substitute for good housekeeping. Notes publishing the Top 50 ranking so close to the end of the financial year inevitably has its drawbacks. Not all of the year-end figures are available in full, and some have yet to report for their latest year. The risk of omissions and incomplete data, however, has to be weighed against the immediacy of presenting a general picture of the year while it is still current SOURCES: The ranking has largely been compiled from each airline group's latest report (either final or prelim inary) translated from local currency into US dollars. The results are for groups, not for their individual air lines. GROUP REVENUES: Revenues are at group level, includ ing non-flight operations and interests in subsidiary air lines. The percentage change is in local-currency terms to avoid distortions from fluctuating exchange rates. OPERATING MARGIN: The operating margin is a mea sure of how a company is performing on its basic oper ations before financial charges, taxes and exceptional charges/income. It is calculated by taking operating profit/loss as a percentage of sales. This should give a way of comparing performance between different groups, although differing accounting standards, espe cially over depreciation, make direct comparisons prob lematic. Also, US companies have tended to charge restructuring costs at operating level, so depressing margins. NET PROFIT/LOSS: The net result is after taxes, financ ing charges, minority interests and extraordinary items. Different accounting standards can again make direct comparison difficult, however. 42 FLIGHT INTERNATIONAL 28 June - 4 July 1995
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