For European carriers, the second quarter brought improved profits but plenty of doubts over the yield environment for the rest of the year.

Operating profits among major European airline groups were $400 million higher in the three months to 30 June, reaching $1.7 billion. Net profits doubled over the same period, to $928 million. This came despite revenues rising only 2%, to just over $30 billion.

European Q2 financials

The yield environment was a central theme for many carriers, especially those operating transatlantic routes, after Lufthansa and Air France-KLM both earlier this summer cited overcapacity on some long-haul routes as one of the factors in cutting their full-year outlook.

Lufthansa reported group operating profit up in the first half, but a 17% fall in second-quarter operating profit as conditions toughened. "Traffic revenue and average yields were down year-on-year in all traffic regions," it said. That includes average yields down nearly 4% on European routes, nearly 3% in the Americas region and almost 5% in Asia-Pacific during the first half.

But it believes cuts in capacity for the winter season – at roughly half the growth rate originally envisaged, and contributing to full-year growth of around 3% – will help stabilise yields. "We feel the capacity cuts are sufficient and enough for what we have at the moment," says finance chief Simone Menne.

Faced with heightened pressure on routes between Europe and Asia from the expanding Gulf carriers, Lufthansa has turned to transatlantic routes for much of its own capacity growth – delivered through operation of larger aircraft.

"For North America, we foresee pressure on the yields, especially on the US East Coast and Canada, as this is where we have the biggest expansion in capacity," Menne says. The carrier will look at its North American routes, though Menne says: "There will be some amendments, but don't expect us to take out half of the capacity. But we will take a look at Canada as our growth is the biggest there."

Lufthansa also identified a more recent decline in Asia-Pacific yields. "For Asia-Pacific, we have the impact on specific routes," says Menne, pointing to the bedding-in of new routes and frequencies added to Tokyo Haneda and Bangkok.

Air France-KLM reiterated its lower profits outlook as it delivered its results, again citing industry overcapacity on "certain long-haul routes" to Asia and North America. However, it points to a cost-saving programme and a tight grip on capacity as helping it to lift operating profit in the second quarter.

IAG, meanwhile, swung back to profit in the first half and its chief executive Willie Walsh reiterated his faith in the group's approach to managing transatlantic capacity, saying it reflects a "strong economy in the US" and having a "better alliance partner than some of our competitors".

The new management team at American Airlines – transatlantic joint-venture partner to BA and Iberia – is "very aligned with our thinking and very keen to respond quickly to opportunities", says Walsh.

He adds: "You've seen excellent capacity discipline in the United States, and the industry there gets credit for it. We're demonstrating equal if not better capacity discipline within IAG; and the opportunity for us is to ensure that we are trimming capacity in a co-ordinated way as we look at the demand going beyond the period we're talking about today: 2014 into 2015.

"Any opportunity we see to trim capacity, we'll take that, and we'll take it in conjunction with our partners."


It is not just long-haul capacity that prompted the lower profit expectations. The still-difficult freight market and continued difficulties repatriating revenues earned in Venezuela also contributed to the challenges.

Air France-KLM, having taken an impairment charge on its cargo activity, is now likely to follow big cuts in its freighter operations at Paris with similar cuts at Amsterdam. It says it intends a "more radical downsizing" of its full-freighter fleet and is considering different scenarios including a partnership with a third party or internal restructuring.

Cargo revenues in the second quarter, during which the group offered 8.6% less full-freighter capacity, were down by more than 5%. Profitability remains "insufficient", says the company. The group says it aims to "protect" its belly-freight business as well as the remaining parts of its full-freighter operation.

While both Air France-KLM and Lufthansa stuck with their lower full-year guidance, Aer Lingus and Icelandair both restored earlier optimism. Like Lufthansa, Aer Lingus and Icelandair were both hit by industrial action during the first half and had lowered their profits hopes as a result.

Aer Lingus, though, reinstated its earlier guidance that profits will this year at least match 2013 levels, noting "good progress" in recovering bookings after the industrial disruption. Icelandair went a step further by lifting its full-year outlook to even higher levels, though this reflected improved collecting on claims in charter operations.

Irish budget carrier Ryanair was another to lift its full-year profit guidance. The carrier's net profits for the three months to June more than doubled to €197 million ($265 million), in part reflecting the inclusion of the busy Easter holiday period this time around. The improvement was based on average fares up 9% during the first quarter a comparison helped as Easter fell in its financial fourth quarter in 2013/14 – and passenger numbers up 4%.

While chief executive Michael O'Leary cites the impact of its repositioning for helping to lift yields, he warns against any "irrational exuberance" based on what continues to be a difficult economic environment. Again it is the yield environment, this time on short-haul, raising concerns.

"We expect the second half to be characterised by a much softer pricing environment as many competitors are lowering fares, partly in response to Ryanair's strong forward bookings," he says. The airline also expects its own strong winter capacity growth of 8% – as it begins taking new aircraft again – to put downward pressure on yields. It expects these to fall 6-8% in the second half, though also sees unit costs rising less sharply than previously expected.

As a result of the expected higher traffic and load factor numbers, with a slightly improved unit-cost performance, the Irish carrier lifted the high end of its profit range by €30 to €650 million.

Source: Cirium Dashboard