European carriers collectively had a strong year in 2007 but the region's airlines are now facing an uphill struggle against slowing demand, rising fuel costs and economic slowdown

Europe's airlines did not have long to bask in the glory of an outstanding set of full-year results in 2007, as the realisation quickly dawned that this year's figures will be a different story entirely. The global credit crunch, economic slowdown and record high oil prices have combined to paint a bleak picture for 2008 and beyond, and it is clear that those European carriers that do not have the benefit of strong balance sheets will be the first to feel the pain.

This year's rankings shows that European carriers in the Airline Business top 150 collectively posted a $6.4 billion net profit and an operating profit of $8.8 billion in 2007, on revenues which soared 18.8% to $168.7 billion. This compares with a 2006 net profit of $4 billion and an operating profit of $5.1 billion.

Three European carriers made it into this year's top 10 airlines ranked by revenue, with Air France-KLM maintaining its position at number one. Lufthansa once again came in at number two, while British Airways stayed at number eight. In total, 32 European carriers featured in this year's top 100 list.

David Henderson, manager information at the Association of European Airlines, says 2007 was "the best year ever for AEA profitability", with member airlines posting a combined profit of €4.2 billion ($6.6 billion). "This was largely driven by an increase in load factors. Demand continued to be quite high and we saw load factors increase for the fourth year running."

Winners and Losers

Henderson also points out that "there were winners and losers among our members and it is no secret that the biggest players drove [the profitability]", with British Airways, Lufthansa and Air France-KLM all posting "strong figures".

However, he quickly adds: "Unfortunately 2007 is history and it became history very quickly. The beginning of 2008 saw distinct signs of demand weakening. We've seen load factors falling this year, which is bad news, but beyond that we've seen all kinds of ­worrying developments, the most obvious of which is the fuel price. Also, public awareness of inflation has grown - the passenger has less money in his pocket and he has become aware that there's less money in his pocket, and this will have an impact."

The AEA is predicting a reduction in profitability for its members for 2008 to "about half the level of last year, but with an uncertainty level of about €500 million either way", says Henderson. The combined result of member airlines will stay in the black this year, he adds, but there is much less certainty about 2009.

"The outlook is a lot less rosy this year, but it probably could be worse because most of the big European players have fuel hedging in place. But there is a time horizon and we will see a real hit to our bottom line next year," he predicts.

Stefano Sala
 "There is a huge wave of consolidation coming - the real question is who's going to buy whom"
Stefano sala
Partner, Oliver Wyman

Stefano Sala, a partner at London-based consultancy Oliver Wyman, says airline managers who have become accustomed to running carriers in a growth period will need to adjust to a completely new scenario going forward. "With few exceptions, most European carriers had a fantastic run in the years up to 2007, thanks to very strong demand," says Sala. "Many C-level airline managers became chief executives and chairmen in this period and only have experience of managing in a growth environment.

"Now airlines are facing the double-whammy of slowing down demand and growing costs. It will be a new challenge for the management to act in a downturn environment like the one facing them today."

In the coming months Sala expects there to be consolidation and competition for scarce funding between European airlines. "In 2008 there will be a high number of companies looking for cash, but the credit crunch has left little money in the pot - and even less appetite for aviation transactions in the ­financial community," he says.

"So the attention is again on those airlines with a strong balance sheet. There is a huge wave of consolidation coming - the real ­question is who's going to buy whom and who's going to be left out?"

Henderson says the individual full-year results for AEA member airlines in 2007 "range from not too bad to pretty terrible", but each carrier's results will take a step down in 2008: "Some airlines last year were comfortably profitable, some were marginally profitable, some were at breakeven and some were loss-making. But everybody will move down one rung on the ladder."



Source: Airline Business