Europe's airlines enter the new year on a more optimistic note than they did the last, with results for the September's quarter showing further evidence of a recovery. A healthy economic environment more than outweighed the fuel price hike, with operating margins among the major carriers in the region nearly doubling.

Particularly encouraging is the return to health of some of the Europe's more troubled carriers this time last year, such as British Airways and KLM. BA showed strong signs of recovery earlier this year and KLM appears to be following suit.

The Dutch flag-carrier's president, Leo van Wijk, says that the results are "evidence of the company's flexibility and ability to respond fast by successfully reducing the manageable component of our unit costs."

Both BA and KLM have constrained capacity growth this year in a bid to improve yields, a strategy which has borne some success.

Ironically, though, the benefits have also applied to those carriers with more bullish attitudes to capacity growth, such as Air France and Lufthansa. The latter, for instance, says it has gained from KLM's more conservative capacity policy.

Air France president Jean-Cyril Spinetta notes that European airlines are falling into two different strategic camps - those adding capacity and those keeping capacity stable: "The main issue will be to see how these strategies will evolve," he says.

Spinetta is adamant that carriers can increase both capacity and yields. Air France's unit revenue per seat kilometre has risen 9.6% in the first half, with load factor increase outstripping the increase in capacity: "There is no contradiction between connecting traffic and the quality of our product," he notes.

However, he recognises that Air France has more room to play with at its main hub, Paris Charles de Gaulle, than most of its main competitors, making its expansive strategy more viable than it would be, for say, BA. The carrier can also take advantage of latent demand on the trans-Atlantic routes resulting from its relative weakness in this market. The situation is fast being rectified with the aid of its SkyTeam partner Delta Air Lines.

Not all European carriers are in such buoyant mood. Austrian Airlines was hit by what it describes as the "difficult" financial situation at part-owned Lauda Air. Austrian has introduced a package designed to increase revenues and reduce costs, amounting to 60 Euro's ($48) million.

Austrian, Lauda and Tyrolean Airways are merging many of their activities. According to a statement from Austrian, "with a clear streamlining of the group structure, it should be possible to realise further synergies."

A restructuring exercise is also taking place at Finnair, where changes are being made to create what it describes as "clearer and more independent business units, which will have their own management bodies and their own business strategies, objectives and reward principles".

This entails a division into six areas, rather than the present three, including scheduled services, cargo and aviation services. Maintenance, ground handling and catering will come under the aviation services division.

Low-fare operator Ryanair stands out with an operating margin more than three times that of most of its competitors. Stronger than expected growth on 10 new routes, the strength of sterling and increased use of the Internet for bookings all helped, as did higher seat numbers on the new Boeing 737-800s, compared to the 737-200s.

A report by merchant bank Morgan Stanley Dean Witter says: "We believe Ryanair's break-even load-factor of 53% remains the best platform for profitable growth in an unexploited European low-fares market."

Morgan Stanley estimates that the equivalent figure for KLM is 76%, and 68% for Lufthansa. Even easyJet, arguably Ryanair's main competitor in the low-fare sector, is estimated to have a break-even rate of 73%, making high-load factor and pricing power key to its future success.

One low-fare operator not doing so well is Virgin Express. The Brussels-based carrier, with a reputation for veering from one strategy to another, recently lost chief executive John Osborne. It is now looking to ditch its Irish operations. Scheduled revenue rose 14% in the third quarter, but high fuel prices and the strong dollar hit hard. n

Source: Airline Business