A faster than expected traffic recovery and cargo bounce-back helped lift European carrier spirits in the second quarter after a miserable last year. But against the uncertain economic backdrop, caution remains the order of the day

For Europe's largely beleaguered airline industry, the second quarter provided a welcome glimpse of light at the end of the tunnel. Traffic has recovered faster than expected, there has been progress on recovering yields and the red ink has started to disappear from the bottom line. But with Europe's recovery behind the pace of other regions and still in fragile form, carriers are largely still wary.

A snapshot of 13 European carriers saw the sector all but breakeven at operating level in the three months ending June 2010. This is a marked improvement on the $745 million loss they racked up in the second quarter of 2009. Revenues jumped 13% over the same period last year. The turnaround at a net level was even more pronounced, though this in part reflects the gains Air France-KLM reported from the sale of some of its stake in Amadeus.

The improved picture was all the more impressive given the three months to June 2010 covered the sporadic partial closure of European airspace because of ash cloud disruption. The level of disruption from the airspace closures is clear. Air France-KLM, for example, estimating a €158 million ($204 million) hit, while British Airways took a £250 million ($390 million) hit from the double impact of ash cloud and strike disruption.

Key to the improved picture for the network carriers has been a passenger traffic and yield improvement, and a sharp bounce-back in cargo traffic. This, combined with measures to tackle costs, brought positive results in the quarter. Lufthansa, for example, points to the measures taken by Lufthansa Cargo, which took advantage of improved conditions to record a €144 million interim profit - a record for the first half and a €278 million swing on the same period last year.

"The reality is the underlying performance in the second quarter was better than had been expected on the revenue side," says CTAIRA analyst Chris Tarry. "What we have seen is a strong business-led recovery in traffic. It's been business-led, but it depends on where your real exposure is." But he highlights the caution, rather than just cautious optimism, that abounded among carriers in the second quarter.

In releasing its second quarter results Lufthansa chief financial officer Stephan Gemkow pointed to a "noticeable recovery" in first and business class bookings in the passenger business and the revenue from long-haul traffic. But, as the Star Alliance carrier presses ahead with its cost cutting measures, he cautioned: "Despite our delight with the very good second quarter, we have not yet succeeded in matching the results of earlier years."

This seems to sum up the mood of carriers in Europe. This is hardly surprising given the concerns, and indeed conflicting signs over recent months, about the fragility of Europe's recovery and where talk of a double-dip recession refuses to go away. But the likes of Air France and BA have seen enough to at least target returns to breakeven at operating level before exceptionals.

Source: Airline Business