There are worrying signs that the fragile recovery in the European airline sector petered out towards the end of 2002, with British Airways, KLM and Lufthansa all sending downbeat messages to investors.

KLM warned of "deteriorating economic conditions" as traffic volumes and yields in the quarter to December came in worse than expected. "During the quarter, the industry has experienced adverse changes in the operating environment," the carrier reports. As a result, KLM says that it is "unlikely" to make an operating profit this financial year, running to March. The airline is cutting its Amsterdam-Abidjan and Aberdeen-Stavanger services, and warns that these moves are the "first step" of a review.

BA reported that market conditions in December were "challenging", having said as recently as November that the revenue outlook had "stabilised". The UK flag carrier expects revenue for the financial year to be down on 2001 levels.

Lufthansa is also warning of a tough operating environment. The German carrier made an operating profit of €790 million ($821 million) in the first nine months of the year, but anticipates full-year results falling back to €750 million. This has surprised analysts as Lufthansa normally makes an operating profit in the fourth quarter.

The group has been hit by the weakness of the German economy, which grew by just 0.2% last year, and is seeing increased competition from the low-cost sector. "A pronounced decline in business travel, especially in Germany, has been evident since the beginning of October in consequence of the general economic development," the company reports. "The resulting deterioration of the passenger mix will have a negative effect on the yield."

Chris Tarry of consultancy CTAIRA warns that these statements are a demonstration of structural changes taking place within the industry, pointing out that the profit declines are coming at a time when load factors are going up. Figures from the Association of European Airlines show that load factors in November are actually 0.8 points higher than they were in the equivalent period in 2000. Tarry says that with a background of low-cost entrants, over-capacity and increased risk of price-cutting by US carriers, the outlook was "dire".

There is also pressure in the cargo market. Lufthansa warned that its performance in December "was affected by the weak economic climate" and reported an annual 1.6% decline in cargo volumes.


Source: Airline Business