There was a familiar ring to results as North American and European carriers disclosed second-quarter earnings.
Amid an environment of sharply lower fuel costs, airlines on both sides of the Atlantic have largely been able to improve profits. But while US carriers' profits run continues almost unabated, much of the talk from Europe's under-pressure network carriers is of not allowing lower fuel costs to mask the requirement to restructure their cost base.
Second-quarter operating profits covering a dozen North American carriers topped $8 billion in the three months ending 30 June 2015. That is more than $2.5 billion higher than the same stage in 2014. Collective net profits were more than $2 billion higher at $5.7 billion.
American Airlines, Delta Air Lines, Southwest Airlines and United Airlines all posted operating profits in excess of $1 billion and generated combined profits of just under $7 billion.
This was achieved despite collective revenues falling more than 1% compared with the second quarter last year, amid weaker passenger yields. But this was offset by the gains from lower costs, which for US carriers are not tempered by exchange losses resulting from the stronger US dollar. For example, Delta – which increased operating revenues 1% – cut its operating costs 9% in the quarter, including a 40% drop in fuel expenses.
But the weaker demand picture has prompted North American carriers to scale back capacity growth planned for the second half, as few see an imminent turn in the revenue picture.
American, for example, sees no improvement in domestic demand in the third quarter, after passenger unit revenues fell 5% in the second quarter. "No, we don't see any improvement in the domestic market, but it's not getting any worse," says Scott Kirby, president of the Oneworld carrier.
United executives made a similar statement with its result, noting that domestic demand had levelled off from the drop it experienced during the first half of the year.
EUROPEAN CONCERNS
While European carriers enjoyed improved financial fortunes in the second quarter, airline executives at the region's network carriers are stressing the need for more cost savings.
The improved profits among European carriers in part reflect a stronger performance at Lufthansa Group, which increased its adjusted operating profit more than 50% to €635 million ($696 million) in the second quarter.
Revenue climbed 8.9% to €8.39 billion as, finance chief Simone Menne notes, the group's passenger airlines "gained extra momentum in the second quarter". But she adds: "The fall in fuel costs is largely responsible for the improvement in our results."
That leads her to sound a note of caution: "We assume that the price level for airline tickets will not recover. We will therefore continue to work consistently on the competitive focus of the Lufthansa Group."
Menne adds the increases were partly a result of "weak" results in 2014 and that it will be difficult to maintain the performance during the second half.
Competition is likely to increase especially in the short-haul arena from September as EasyJet and Ryanair expand their operations in Germany, while for Lufthansa's long-haul business the benefit of favourable currency effects will lessen, says Menne.
Unit revenue rose 2.8% during the first six months, especially on the back of strong performance on routes to North America. But without exchange-rate effects, unit revenue declined 4.1% during the January-June period.
Lufthansa Group has confirmed its full-year outlook. It foresees an adjusted operating profit of more than €1.5 billion "before strike costs".
Air France-KLM Group meanwhile is to implement new cost-saving measures immediately after its latest financial figures showed operating profits down a fifth for the quarter. These measures will include cutting routes and restricting winter capacity.
The group sees savings on fuel expenditure being offset by unit revenue pressures and the negative effects of currency exchange, in a repeat of what happened in the first half.
This "more challenging revenue environment", it adds, has spurred the company to "accelerate" implementation of its Perform 2020 turnaround programme.
A "significant" proportion of Air France's long-haul network is not profitable, says group chief executive Alexandre de Juniac. If negotiations with unions cannot be concluded by the end of September, he says, "we have to reduce significantly the long-haul network at Air France".
The carrier's economic performance is "not sustainable in the long term", adds Air France chief Frederic Gagey.
Cost savings under Air France-KLM's Perform 2020 restructuring plan were previously to be realised over a five-year period, but that time schedule has been shortened to three years for both carriers, says de Juniac.
Gagey says Air France would only grow again if targeted cost reductions were implemented. But if this was achieved soon, he indicates, the carrier could start growing again in 2016 or 2017. Sister carrier KLM reached labour agreements for pilots, flight attendants and ground personnel during the first half of this year. But group finance chief Pierre-Francois Riolacci says any savings would only realised if the agreements were implemented during the second half.
British Airways and Iberia parent IAG turned in a second-quarter operating profit of €530 million ($580 million), a rise of almost 40%. This helped it more than double operating profits for the half year to €555 million.
At constant currency, revenues for the quarter were down 1.2%, with passenger unit revenues down 6.6%. Non-fuel unit costs fell 6.9% and fuel unit costs 12%.
Walsh says the figures show the company is continuing to "take cost out of the business". He says IAG is "on track" to reach its full-year targets. It has maintained its expectations of a full-year operating profit exceeding €2.2 billion.
First-half operating losses deepened at IAG's planned new recruit, Aer Lingus. But the carrier insists it is "well positioned" to deliver improved operating performance over the third quarter and the full year.
Aer Lingus says it experienced "adverse effects" from unfavourable currency exchange but expects these to "moderate" in the second half, as higher proportions of US dollar revenues emerge. "Both short- and long-haul capacity are set to expand into the peak season and we are very satisfied with forward yield and load-factor profiles at this time," says chief executive Stephen Kavanagh.
He adds he is "very confident" that the Irish carrier can achieve a 10-14% operating profit margin target set by IAG if successfully acquired by the UK-based airline group.
"Our margins have been consistent, but they haven't seen a step change," says Kavanagh. "Now what gives us the confidence is that we can continue to grow the top line, but in the past we have been constrained by costs related to our scale of activity. We haven't been constrained in terms of network opportunity, but we have been prudent in terms of the risks we were willing to expose the business to in exploiting that opportunity.
"I think those two dynamics fundamentally change as we grow more confident in our ability to grow."
IAG at the end of July again extended the deadline for Aer Lingus shareholders to accept its takeover offer, adding that the 90% acceptance condition has been waived. Shareholders representing almost 62.5% of Aer Lingus share capital had accepted IAG's offer as of 30 July.
Source: Cirium Dashboard
