As we have suggested in previous columns, the outlook for 2011 has not only deteriorated since the start of the year, but may still get worse. However, generalisations are always dangerous and the more interesting focus is on where this more difficult environment gives rise to opportunity, for which airlines and why.
The "results season" for the first calendar quarter of 2011 has come to an end and, as ever, there are some interesting numbers and comments. However, since results are history and usually, although not always, in line with expectations, it is the view of the future that is often of more interest. Almost universally, the outlook is uncertain. In last month's column, we touched on the issue of rising fuel prices and their consequences, but - no matter how much the fuel price may have increased - the two most important issues concern the relative importance of fuel and the ability to recover at least part of the increase.
Even with the simplest back-of-the-envelope calculation we can quite easily see which airlines have the greatest relative exposure to fuel prices. Using the latest reported figures and measuring the fuel bill as a percentage of total operating expenses, we can observe from our sample:
The share of fuel at Singapore Airlines in the January-March quarter 2011 was 38%, compared with 34.5% for the same period in 2010;
For IAG fuel accounted for some 30.2% of operating expenses in the same quarter of 2011, compared with 25.4% for the same period in 2010;
For Lufthansa's passenger airlines, fuel was 21.4%, up from 19.2% a year previously;
At Continental, fuel accounted for 32.7% of costs, compared with 25.4% in the first quarter of 2010.
For the full year 2010/11, fuel at Emirates accounted for 34.3% of operating expenses, compared with 30.6% in the previous year;
Elsewhere, the figures for the latest results were 27% vs 24% for Easyjet (for the first half of 2010/11 vs the first half of 2009/10); 23.5% for Norwegian in the first quarter of 2011, compared to 21.7% to the first quarter of 2010; and 19.2% vs 20.5% for Aer Lingus over the same periods.
However, the real issue is the extent to which it may be possible to recover the additional fuel cost. In this regard, those airlines operating in the long-haul market have the greatest opportunity, either through surcharges and fare increases or, more in the economy cabin, through reduced availability of lower fares and revenue-managing the problem. However, the extent of the success will reflect the relative balance of supply and demand and, although long-haul premium markets have been strong, with year-to-date growth of around 6.1% (according to the latest IATA Premium Monitor), the increase in March was just some 2.9%. Overall, however, the relationship between supply and demand is less favourable than in 2008 and the indications that some management groups are contemplating capacity reductions is a reflection of this.
For short-haul airlines, in Europe for example, the ability to recover the increased cost of fuel is more of a challenge. To put it into context: for Easyjet to recover the additional cost of fuel, before anything else it would have needed an average of £3.26 ($5.28) extra from each of its passengers. Against this background, the airline's management stated in its results announcement that in order to achieve revenue targets it will have improvements in "yields, bag charges and other ancillary revenues". In this respect, Easyjet is not alone, as for low-cost carriers the more remunerative route is likely to be through ancillary charges.
Overall, the risk to airline earnings clearly remains. However, there is increasing volume from those who espouse the view that the current environment will result in more consolidation and that the more difficult it is, the greater the acceleration in this process will be. Indeed, there are already plenty of news stories suggesting a range of possible combinations and we will doubtless see which fall into the category of hopes and/or expectations and which turn out to be real.
Perhaps more than ever, the pertinent questions of 'why' and 'why now' should be asked more forcefully when the operating environment is more challenging. It is important to remember that there can be a significant difference between the price of something and its value: just because it appears to be cheap, does not mean that it represents good value.