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Europe's low-cost carriers on the front foot

The difference in tone between network carriers and their budget rivals could hardly be more different. Recent weeks have been peppered with bright results from low-cost airlines, while more red ink has dripped from network carriers. Indeed the Association of European Airlines considers the predicament facing the industry so grave it is calling for a stakeholder summit.

"Portions of our industry are close to collapse. Indeed, we have seen failures among premium, leisure, no-frills and cargo carriers," says AEA secretary general Ulrich Schulte-Strathaus. "Some network airlines are ceasing to exist as independent entities. Others are exiting markets that they will not re-enter. Secondary markets are losing service."

AEA projects its members will rack-up operating losses close to €3 billion ($4.5 billion) this year and sees little sign in September's 3.4% fall in traffic of an imminent recovery. Schulte-Strathaus says its members collectively failed to make a profit this summer, leaving them ill-prepared for a "heavily unprofitable winter". He says: "Steps must be taken now to act positively and decisively to create the conditions under which prosperity can be restored as quickly as possible."

The bare numbers so far from the current reporting quarter are bleak; Air France-KLM, British Airways and Iberia makinga net loss of close to €350 million between them. But all point to some improvements.

BA, which made its first loss at the halfway stage and expects around $1 billion to be wiped off full-year revenues, sees progress in cutting costs and a gradual stabilising in traffic and yields, albeit off a low base. More encouragement came from October premium traffic falling only 1.4% year-on-year. But BA chief financial officer Keith Williams cautions: "Although we are seeing some recovery, we are still running at premium passenger levels some 10% down on where we were two years ago."

BA's now confirmed merger partner Iberia also posted a loss for its third quarter, but takes comfort from the lower scale of this loss in comparison to its first two quarters. Like BA, Iberiais pressing for structural change. It has embarked on several measures including launching a new short/medium-haul operator to feed traffic into its long-haul network.

While Air France-KLM made an operating loss of €534 million in its first half, chief executive Pierre-Henri Gourgeon says: "After deep losses in the first quarter, the second was close to break-even despite the lack of recovery in unit revenues." It aims to break-even next year.

Yet Europe's low-costcarriers saw more immediate bottom-line gains. Growing Scandinaviancarrier Norwegian continued its progress, posting its highest ever third quarter operating profit of NKr475 million ($85 million). Newly merged Spanish carrier Vueling continued its upswing by trebling third quarter operating profit to €68 million, while Germany's Air Berlin more than doubled its net profits in the third quarter to €95.2 million.

Ryanair chief executive Michael O'Leary argues all airlines should be seeing improved performance because of lower fuel costs this year. His carrier, inbetween raising the stakes with Boeing over a new aircraft deal, revealed a €387 million first half profit. And while he expects a loss for the second half, driven by a predicted fall in yields of up to a fifth, O'Leary says it will still post a full-year net profit in the lower regions of the €200-300 million estimate range - a marked improvement on 2008.

O'Leary expects to pour further pressure on network carriers as their cutbacks create more opportunities. "All of the big flag carriers are cutting capacity and this is where the growth will be.That is putting enormous pressure on airports around Europe [to find new capacity]. You can see the declines all over Europe. I think you will see significant passenger opportunities for us," he says.

EasyJet, which ended its financial year in September, saw net profits halve to £54.7 million ($90 million). But carrier chief executive Andy Harrison describes this as a "resilient performance", and its evolving strategy helped increase revenue per seat 4.1% over the year. While predicting a tough winter ahead, Harrison says the airline expects to significantly improve its profit for the coming year.

Turkey's Pegasus Airlines also believes it is benefiting from the current market. "In every economic crisis in the past the low-cost carriers have grown, either because they could buy aircraft cheaply or because guests traded down," says chief executive Ali Sabanci. "We are growing the business. And the growth in our business is bigger than our growth in capacity and that is the trick."He says the airline will be profitable again this year andsuch is his optimism in the carrier and its valuethat Pegasus is looking towards a possible flotation in the second half of next year.

London-based analyst atPanmure Gordon, Gert Zonneveld,says the low-cost carriers' performance has held up reasonably well. In particular he points to easyJet's achievement of not only increasing its revenues per seat over the last year amid modest growth, but that it sees only a few percentage point drop in revenue per seat for the coming year even with an expected 10% increase in capacity.

Watch our video report on why low-cost carriers believe they can thrive in a downturn here

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