Almost every major European carrier posted profits in the third quarter, but how long can the buoyant mood last?

Continuing robust economic growth saw nearly every European carrier report healthy third quarter results. Aegean, Air Berlin, Lufthansa, Norwegian, Ryanair and Swiss all reported double-digit revenue growth for the period.

Air Berlin's impressive 68.2% revenue improvement was primarily thanks to the incorporation of dba and LTU into the airline's operations. Norwegian, which chalked up revenue growth of 50.8%, benefited from surging demand and network expansion. Ancillary revenues continued to bolster Ryanair's results, enabling the airline to post a 24.8% increase in revenue despite a slight reduction in its average load factor and the refusal to impose fuel surcharges.

Bearing fruit

Although Austrian's revenue growth was down 8.2% on 2006 figures, the carrier's decision to cut unprofitable routes is beginning to bear fruit, as evidenced in the improvement in operating ­results year-on-year (see p18).

The general attitude among Europe's airlines is that healthy profits will endure well into 2008, despite warnings from those predicting a downturn thanks to high fuel prices and credit market turmoil. "It is very hard to make forecasts but we do feel positive for 2008. We are enjoying a strong business cycle," says Tobias Hägglöv, SAS Group's investor relations manager. "There is some weakening in yield, but we are seeing strong forward bookings and there has been no noticeable slowdown in demand. We expect business ­demand to remain steady."

Adds Finnair's director of investor relations, Taneli Hassinen: "We are seeing growth figures in demand and our advance booking records are encouraging. The high fuel price is disturbing and underlines the importance of continuous cost cutting. If a downturn hits the sector, it remains to be seen which geographical areas it really affects."

The story is the same across the board: forward bookings remain strong, there is no obvious slowdown in demand and the fuel hikes can be managed through hedging, surcharges and strong traffic growth, particularly on long-haul operations. "Our outlook is positive," says Lufthansa. "Forecasts do indicate that the market will be slowing down, but what we do not know is how ­severe this will be."

The fact that the credit crunch comes at a time when global economic growth is strong should soften its impact. While expecting the industry downturn to become apparent in 2008, Stefan Bruehlmann, manager of strategy and statistics for the Association of European Airlines, says: "We do not assume a sudden hit. We estimate that [operating profits] will peak in 2007 at €3.2 billion [$4.7 billion] and then come down to €2.6 billion in 2008 - equivalent to 2006 levels. Higher oil prices, the risk of a slowdown in demand and limited scope for further cost-savings substantiate our somewhat more cautious outlook."

AEA figures indicate traffic is still strong. Asian routes continue to produce strong yields fuelled by the economic boom in the region. This has also been compensation for a decline in business traffic on European routes. By contrast, yield growth on North Atlantic routes has flattened with load factors falling slightly below 2006 levels. "There is no obvious impact from the credit crunch. The weaker load factors on North Atlantic routes go back as far as July 2006," says Bruehlmann.

Fuel remains the overriding threat to airline profitability in 2008. In 2006, fuel cost represented 23% of AEA airlines' total operating cost, equivalent to $21.8 billion. AEA estimates the 2007 fuel bill will rise to $25.2 billion and 25% of total operating cost.

While hedging strategies, fuel surcharges and growth in long-haul traffic have meant that rising fuel costs have had a "surprisingly limited impact" on the bottom line to date, airlines are looking at a more challenging future, says Bruehlmann. "Softer demand and/or yield decline and oil prices remaining at current levels means we expect oil prices to become an issue for 2008 and to affect the bottom line," he says.

Source: Airline Business