High fuel prices continued to bedevil the balance sheets of airlines in Europe and Asia in 2005, only partially ameliorated by a significant increase in passenger numbers and load factors, and a reduction in manageable costs as several airlines undergo structural reform. After a lull in the early part of the year, fuel prices again rose sharply, exceeding the levels of the previous year and remaining exceptionally volatile. The continued imposition of fuel surcharges failed to cover the increases. High security charges have also been blamed by some airlines.

Italian flag carrier Alitalia turned in a credible performance, despite a 35% increase in fuel costs amounting to €233 million ($280 million). Although it incurred a net loss for the year, this was substantially reduced. The increase in fuel costs, after hedging, at Iberia amounted to 32.5%, or €212 million, lifting operating expenses by 4.4%. The pain was lessened by an increase in passenger numbers and capital gains from the sale of its stake in Amadeus and Savia. The €663 million in capital gains partly covered extraordinary provisions to cover staff restructuring and fleet replacement.

The Austrian Airlines Group suffered more than most from high fuel prices – up by 46.6% or €144.5 million – compounded by a rise in personnel costs in anticipation of growth, which had to be readjusted later in the year. A doubling of the security charge triggered weak demand in the first quarter. The net result of these factors was a 13.2% increase in operating expenses and a trebling of its net loss.

The Scandinavian multinational SAS Group returned to profit against a background of higher operating revenues and SKr14.2 billion ($1.85 billion) savings generated by its Turnaround 2005 programme. Further cost-cutting measures have been initiated to shave another SKr2 billion of cost in 2006. Profit was generated from a number of business units, but the Danish and Swedish arms of SAS and Scandinavian Airlines International remained in the red. Income from the sale of aircraft, and its European Aeronautical Group and Jetpak businesses, as well as 67% of SAS Component, helped the bottomline. Fuel costs were 30% higher in 2005 and totalled SKr8.1 billion, four times the amount expended five years ago.

In 2005, SAS instigated a review of all factors contributing to fuel consumption. This fuel-efficiency programme will be rolled out to all group airlines in 2006 with the goal of cutting fuel costs by SKr250 million annually. Strong demand, an increase in average prices and improved productivity enabled Finnair to boost profitability, in spite of a 37.7% rise in fuel costs.

High fuel prices also continued to weigh heavily on Hong Kong’s Cathay Pacific Airways. A 67.2% rise in fuel costs to HK$15.6 billion ($2 billion) resulted in reduced profit for the year, with passenger and cargo surcharges only partially covering the additional cost. Against a background of record revenues from both passenger and cargo traffic, the result was disappointing, prompting chairman Christopher Platt to comment that the 2006 result will remain “heavily dependent on fuel prices”. China Eastern Airlines, one of the three major airline groups in mainland China, has warned that its 2005 profit will be halved compared with the previous year, suggesting that soaring fuel prices are largely to blame.

China Southern Airlines similarly indicated a likely full-year loss, adding intense new competition on the domestic market to the high fuel price as the main factors. Korean Air reported net profit down by 61%. “High fuel prices throughout the year combined with the pilots’ strike in December caused a decrease in the net profit. However, our efforts to enhance profitability through cost savings and fuel surcharges brought about an increase in operating profit,” says chairman and chief executive Cho Yang-ho. Fuel was also cited as a major cause for the decline in profitability at Thai Airways. Fuel costs went up by 50.7% in its financial year to the end of September 2005. ■


Source: Airline Business