Early results from European carriers show the combination of a strong summer and lower oil prices have driven sharply improved profits, though underlying challenges remain for several.
Europe's big-three network carriers Air France-KLM, IAG and Lufthansa have all reported increased profits for the third quarter.
Air France-KLM's operating profit more than trebled to almost €900 million ($985 million) in the third quarter, though the increase is only around €300 million on a like-for-like basis when the impact of September 2014's damaging pilots strikes are included. IAG and Lufthansa each lifted third-quarter group operating profit around $400 million, to $1.35 billion and $1.24 billion respectively.
Factoring in Ryanair, which recorded a $300 million improvement in its operating profit for the quarter ended 30 September, there is a picture of much improved profits for the European carriers to have so far reported financials for the quarter covering the summer peak. Collective operating profits increased two-thirds to just over $5 billion, while collective net profits almost doubled to just under $4 billion.
Europe's low-cost carriers had already indicated a strong summer. EasyJet, Ryanair and Wizz Air all raised their full-year profit expectations in September, citing summer performance.
Ryanair says its passenger figures and fares both rose more quickly than the airline had laid out in earlier guidance, and that this trend has continued into the third quarter. In reporting its latest quarterly results earlier this month, the airline lifted its full-year net-profit range a quarter to €1.175-1.225 billion and reaffirms this by saying it expected profits to be at the upper end of this range,.
"We have enjoyed a bumper summer due to a very rare confluence of favourable events including stronger sterling, adverse weather in northern Europe, reasonably flat industry capacity and further savings on our unhedged fuel," says Ryanair chief Michael O'Leary.
Wizz upgraded its profit hopes for a second time in as many months at the end of September, while EasyJet – which discloses full-year profits later this month – also lifted its pre-tax profit forecast to £675-700 million ($1.02- 1.06 billion) on a "stronger than expected" August and bright September outlook.
Figures from Europe's network carriers underline the same strong summer environment mix of robust demand and lower fuel prices. While the oil price began falling more than a year ago, the benefit is being more widely felt by airlines as hedges at the previous higher rates start to unwind – even if the strong dollar continues to take some of the shine off these gains.
Both Icelandair and Lufthansa have already raised their full-year profit guidance off the back of strong third quarters.
"Our third-quarter business performance is particularly good as we were able to improve a number of our key performance indicators." says Lufthansa's finance chief Simone Menne. The German airline group raised its adjusted operating profit target by €200 million to €1.95 billion.
Icelandair raised its full-year earnings forecast to $210-215 million following an improved third quarter. The company says its preliminary third-quarter result shows an increase in earnings to $150 million, compared with $124 million for the same period in 2014.
At IAG all four of the group's carriers, including new recruit Aer Lingus, improved third-quarter profit. British Airways, though, continues to drive the majority of this – accounting for €825 million out of group operating profit of €1.2 billion excluding Aer Lingus.
"Our passenger unit revenue showed a better trend than in the second quarter of the year and our cost performance remained strong," says IAG chief executive Willie Walsh.
Air France-KLM chief Alexandre de Juniac echoes the improved conditions for airlines in the key summer quarter. “A favorable environment, principally characterised by lower fuel prices and strong demand over the summer, resulted in an improvement of Air France-KLM's results during the third quarter and first nine months of 2015," he says.
But the the strong summer does not mean the underlying issues at network carriers – not least the labour issues at Air France and Lufthansa – have gone away. Both have been involved in long-running battles to secure new labour terms. While union opposition and industrial action has put industrial heat on the airlines, both Air France and Lufthansa are now looking at cuts to mainline capacity as they step up the pressure on unions to deliver structural change to their cost base.
At Air France-KLM – where tensions around securing a new labour productivity a deal at Air France boiled over in high-profile scenes of unrest during September – labour concerns dragged on its brighter third quarter. The carrier has throughout the year been warning of yield and currency pressures outweighing the benefits of lower fuel prices, and even with the strong summer, the absence of a new productivity deal with Air France staff prompted lowering of the full-year unit cost-reduction target.
"This [summer] improvement is however not sufficient to bridge the competitiveness gap with our competitors or to generate the financial resources required to finance the group's growth," says de Juniac. "The implementation of the Perform 2020 [cost-cutting] plan is therefore vital since unit-cost reduction is Air France-KLM's main lever enabling the group to return to a profitable growth path in a highly competitive environment."
The carrier ultimately lost patience after failing to secure a new productivity deal with pilots by its end-of-September deadline, embarking on a restructuring "plan B" under which it will slash up to 2,900 jobs and reduce long-haul fleet capacity 10%. That includes retiring the carrier's Airbus A340-300 fleet, which it had planned to operate on an extended lease-basis until 2019.
But it left the door open to mitigating some of these cuts if a deal on productivity could be reached and last month resumed talks with pilot union SNPL.
Lufthansa, meanwhile, is back enduring strike disruption, after mainline cabin crew began an eight-day walkout on 6 November over pensions. The airline has been forced to cancel around 30% of its schedule, and estimates the strike is costing it double-digit millions of euros per day.
The airline has set out its willingness to resume talks and tabled an improved offer covering a new labour deal. But it too warns of capacity cuts if it is not able to restructure its cost base. "It is clear to us, that with this new concession, the urgent and necessary improvements in our cost and competitive position cannot be reached, and the gap between us and our relevant competitors will get larger," says Lufthansa chairman Karl Ulrich Garnadt.
Against this backdrop the board has decided to re-evaluate the planned development of Lufthansa's mainline capacity and routes for next year and to "reassess" them for the following years.
"In view of the as-yet-unsolved structural cost problems, the low-yielding Lufthansa German Airlines routes, especially to Asia, Africa and South America, will be subject to review," the airline says.
The German carrier has been dogged by a string of strikes by different labour groups over the last 18 months. But Lufthansa chief executive Carsten Spohr does expect its long-standing labour dispute with mainline pilots to progress toward an agreement over the controversial expansion of low-cost arm Eurowings.
Speaking during its third-quarter results conference call at the end of last month, Spohr said pilot union Vereinigung Cockpit now "understands that structural change cannot be halted", in reference to Eurowings' establishment as a secondary platform in addition to the group's network carriers. This comes after a recent Frankfurt court ruling that the union's industrial action was chiefly a protest against management's expansion strategy centred on Eurowing – and as such unlawful.
Spohr argues that negotiations with the union can now exclusively concentrate on employment terms at Lufthansa's mainline operation and how that can be expanded in future. Its fleet has not been expanded since 2011 and, for the first time, declined since last year in terms of aircraft numbers, he says.
Source: Cirium Dashboard