In a strong economic environment Europe's carriers are enjoying increased yields despite substantial capacity hikes, but fuel prices remain a concern
Europe's airlines are continuing to put in strong performances, with no sign of an end to the good times for the time being at least. "Whether we are at the top of the cycle remains to be seen," comments Gert Zonneveld, analyst at Panmure Gordon. "It has been a very strong year. Despite sizeable capacity increases, yields have generally gone up and premium cabin demand remains strong."
While airline chief executives are no doubt anxious to see whether the US economy has a hard or soft landing in 2007, fuel remains the main concern. Andrew Lobbenberg, analyst at ABN-AMRO, points out that Air France-KLM will feel the pinch next year as its strong fuel hedging positions unwind. The combined entity has benefited from its decision to get in early with its hedges, before prices spiked earlier this year.
Air France-KLM is, however, on the downward curve as far as capital expenditure is concerned. Many carriers, including British Airways and Iberia, have fleet decisions pending, as does, in theory at least, Alitalia. "All European carriers are waiting for the Airbus A350 to be defined," says Lobbenberg.
BA has been on something of a capital expenditure holiday in recent years, but will see its stellar cash performance take a hit as it renews its long-haul fleet.
Not surprisingly, BA is at great pains to make this point clear to unions, which are battling against plans to reduce BA's ballooning pension deficit.
Despite the overall strong performance, airline heads point out that the industry cannot take this as an excuse to let up on cost-reduction efforts. "The earnings trend is positive, but the strong economy is a significant contributory factor. The result is far from the group's return requirements and, accordingly, it is necessary to continue focusing full energy on cost-cutting measures," warns Gunnar Reitan, SAS's acting president.
Similarly, Finnair chief executive Jukka Hienonen insists that cost-cutting efforts must continue, and argues that the carrier must go ahead with plans to hire cabin staff on its key Asian routes under more competitive terms. "We must increase efficiency," he warns. The carrier was hit by a two-day strike in October over the issue.
Iberia also suffered from labour unrest in July, but still managed to post an 8.6% increase in operating profits for the quarter. BA, of course, took a financial hit in the summer for a different reason, the threat of a terrorist attack, and says as a result total revenue is expected to be 4.5% higher than last year, rather than 5% as previously expected.
In the low-cost sector, recently floated Air Berlin saw its share price take a dive in November after it announced its 60-strong order for Boeing 737-800s. However, Lobbenberg points out that this was essentially a reaction to talk of a rights issue. The carrier put in a strong third quarter, and has seen a 76% increase in earnings for the first nine months of the year to €41.4 million ($55.1 million), while revenues increased 20% to €1.12 billion. "I'm pretty upbeat on Air Berlin. I think they are going to be Germany's low-cost flag carrier," predicts Lobbenberg.
Fleet expansion
EasyJet also announced a fleet expansion in November, firming up options on an additional 52 Airbus A319s and taking options on a further 75 A320 family aircraft. This was on the back of an impressive 56% increase in pre-tax profits to £129 million ($253.7 million) for the full year (easyJet's full year is to September). Passenger revenues increased by nearly 6%, or £2.13 per seat.
In announcing its own strong September quarter performance, Ryanair chief executive Michael O'Leary indicated that winter yields were expected to be flat, as opposed to the 5% decline previously indicated. O'Leary has had a reputation for predicting winter bloodbaths in recent years, although they have never quite materialised.
No doubt, Europe's airline boardroom's will be hoping his relative optimism this year will be vindicated.
Source: Airline Business
