Market uncertainty and high fuel prices began to take a further grip on Asian and European airlines in the fourth quarter of 2011, leading to a fall in industry profits across the two regions.

While the picture differs for carriers in both regions and some operators maintained or even improved their financial performance last year, few could escape the impact of higher fuel prices on their business. Unravelling hedges and the renewed climb in oil prices so far this year, which has seen the price reach $125 per barrel of Brent Crude Oil, underscores the size of the challenge ahead for airlines in 2012.

Despite rising fuel prices and Europe being engulfed in negative economic headlines for much of the year, many of its carriers remained profitable. However, just as economic conditions across Europe lack uniformity, so the fortunes among European carriers differ widely.

This more evident with the continent's biggest three network carriers. British Airways and Iberia parent International Airlines Group increased profits for the year, but while Lufthansa enjoyed higher operating profits than IAG, it was dragged into a net loss for the full year; and Air France-KLM ended up in the red at operating and net levels.

One thing all three carrier groups have in common are sharply differing performances among their constituent airlines. Iberia, BMI and Air France respectively all weighed heavy on their parents during 2011.

Air France-KLM posted group operating losses of €353 million ($461 million) for 2011 and net losses were even heavier. These losses were largely attributable to Air France, which made an operating loss of €565 million during the year. This has put further momentum on efforts to restructure the French operation. It has already outlined a three-year plan to cut €2 billion off its net debts, half via cost-cutting and the remainder through restructuring its business, notably loss-making medium-haul activities.

Group chief executive Jean-Cyril Spinetta hopes to avoid a lengthy wait before the airline can implement the main part of its Transform 2015 recovery plan, by sealing talks with its unions over collective workforce agreements prior to announcing the politically sensitive measures.

The central tranche of the plan will be unveiled in June, after elections in the country. Spinetta says this will allow union negotiations to conclude. Under French labour law, if Air France was to impose new terms and conditions on its employees, it would be required to wait 15 months before they would take effect. Talks began in March. Spinetta says: "We remain confident that an agreement will be reached."

The group says its first-half operating performance will be below its 2011 level, but it expects the second half to benefit from improvements from its restructuring programme.

Lufthansa group operating profits slipped to €820 million from €1 billion in 2010, yet remain the largest among European operators for the year. However, its full-year net profits were wiped out completely by €285 million losses at BMI and valuation effects linked to its disposal. It posted a €13 million net loss for the year compared with profits of €1.1 billion for the same period.

IAG doubled operating profits to €485 million before exceptional items. The group also improved fourth-quarter profits despite increased fuels costs. Full-year fuel costs jumped almost 30%.

IAG chief executive Willie Walsh highlights the strong demand from London and encouraging trends over the North Atlantic. The relative strength of the British Airways portion of the business during the past 12 months was underlined by full-year figures showing the UK airline generated an operating profit of €592 million in 2011. This compared with losses of €61 million incurred by Iberia.

Iberia's short-haul revenues remain well below 2008 levels, and the Spanish carrier as a whole performed significantly worse than BA in 2011. "This requires major surgery and that major surgery comes in the form of Iberia Express," says Walsh.

The new short-haul operation from Madrid launches this spring despite fierce opposition from Spanish pilot unions. Walsh says the likely €100 million positive impact of launching Iberia Express "outweighs the cost of the disruption".

Elsewhere, in Europe's low-cost sector Ryanair turned a third-quarter loss for 2010 into a small profit in 2011. EasyJet points to strong bookings so far that make it optimistic it can recover most of its additional €100 million in fuel costs to keep winter losses on a par with the same period last year. Spanish carrier Vueling lifted its full-year profits for the year ending December 2011.


For Asian carriers, many of which have greater exposure to the struggling cargo sector, market difficulties and energy prices took a strong hold for many. Profits among several Asian carriers struggled in the last quarter and in the full year. Collective operating profits (see right) halved in the last quarter and were sharply down for the full year. At a net level, Korean Air, Thai Airways and Malaysia Airlines all ended 2011 in the red.

MAS particularly struggled. When Malaysia's national investment agency sold a stake in MAS to AirAsia chief executive Tony Fernandes in 2011, it was a clear sign it wanted to end the increasingly bitter - and costly - competition between the two carriers.

Just how costly the previous MAS strategy was finally came to light in February, when the full-service carrier reported a net loss of M$2.5 billion ($830 million) for 2011. This compared with a profit of M$237 million the year before. Almost half of those losses came in the last three months of 2011 alone.

This was despite 2.3% growth in revenues to M$13.9 billion, with expenditure up 21% to M$16.2 billion, mainly fuel costs up a third. This resulted in an operating loss of M$2.3 billion, versus an operating profit of M$176 million in 2010.

MAS chairman Mohammed Rashdan Mohd Yusof says the airline is "in crisis", but adds the new management team which came into the company's offices in Subang has a "business plan in place that will bring the necessary sacrifices to ensure a turnaround and recovery".

Chief executive Ahmad Jauhari Yahya, who took over after the AirAsia sale, says that following the dismal results, the company will take "strong measures to stop the bleeding", including staff redeployment, productivity measures, "relentless" cost controls and a review of the network.

The airline, which warned in late 2011 that its situation was so dire it might not even survive beyond 2012, is also looking to raise capital via debt or by going to the equity markets.

It also booked an impairment charge of M$314 million against the value of its relatively new four Airbus A330-200 Freighters, blaming the airframer's decision to launch a passenger-to-freighter conversion programme for the type. The airline, which also operates two Boeing 747-400 Freighters, warned of significant challenges in the cargo market.

MAS plans to cut the size of its fleet from 91 aircraft to 80 by 2014, and to return some 58 older airframes to lessors. Most of these are its "older uneconomical 18- to 19-year-old aircraft", the bulk of which are likely to be its Boeing 737-400s - all but three of the 36 aircraft in its fleet were built before 1995. The cost of the retirements will be M$1.03 billion, with a charge of M$602 million booked in 2011 accounts and a further write-down on the value of aircraft spares costing it an additional M$179 million.

The retirements come as MAS gears up to receive 23 new aircraft in 2012, including five Airbus A380s. The A380s, in particular, will be at the forefront of the airline's rejuvenation.

The initial two A380s, the first of which will be delivered in June, will have 494 seats in a three-class configuration and be put into service from 1 July on flights between Kuala Lumpur and London. The third aircraft will be deployed on Kuala Lumpur-Sydney - another highly lucrative route for the airline.

"Its technology, futuristic style and innovative design in cabin comfort are our initiatives to ensure that our passengers continue to experience an exciting new level of comfort, luxury and convenience," says Ahmad Jauhari.

"This is the identity that will move us from 'traditional classic' to 'premium contemporary' in our efforts to position Malaysia Airlines as a preferred premium carrier," he adds. For MAS to survive, it is a strategy that must work.

Source: Airline Business