The major European airlines were glad to see the back of 1999 as operating margins among the lead carriers halved.

If the European majors saw operating margins spiral in 1999 then the causes are not hard to trace. Yields tumbled as airlines struggled with surplus capacity, particularly on the North Atlantic, while a doubling in fuel prices did not help. The top 10 European airlines saw $1 billion shaved off their collective net profit, excluding exceptional gains from the sale of stakes in Equant and the Amadeus computer reservation system.

There was encouragement in the second half of the year, however, with most reporting a recovery in passenger yields. Among the quickest to gain were British Airways and KLM, both of which were early to embark on a strategy of reducing seat capacity. The upswing at BA, which is reducing back-of-cabin capacity in favour of more spacious business class seats, has now seen yields increase for the past 11 months through to May.

While BA can take some encouragement from these figures, it was not alone in experiencing the upswing. Carriers such as Lufthansa and Air France, which had indulged in more aggressive capacity growth have also begun to report better news on yields.

Robin Horne, analyst at the HSBC bank, puts the success of Air France down to "a very successful strategy of combining point-to-point with connecting traffic". In contrast to some rivals, the French carrier has plenty of room for expansion at its main Paris hub.

Air France chairman Jean-Cyril Spinetta was in buoyant mood when announcing the annual results at the end of May: "Unlike our competitors, we have been able to generate a substantial increase in net profit." It was the only airline in Europe's top 10 to increase operating margin.

Lufthansa chairman Jurgen Weber was in bullish mood as he announced his company's 1999 results, despite a fall in operating and net profits. Most analysts agreed with Weber's assessment that Lufthansa had done relatively well in the circumstances. According to IATA figures, the Lufthansa Group accounts for a third of total airline profits, up from 20% in 1998. The German airline, however, saw a sharp decline in yields last year. There has been some improvement this year, by around 2% in the first quarter.

Most European airlines saw yields benefit from a weak euro exchange against the US dollar - the major exception was BA, which had the opposite problem due to the strength of sterling. However, airlines such as Air France, which had a significant amount of dollar and yen denominated debt, suffered on costs.

BA's operating margin is well below the average, although it is joined at the bottom by its prospective merger partner KLM. This should do the respective airlines no harm in their forthcoming talks with Brussels on their planned merger. No doubt SAir will hope to improve Sabena's meagre operating margin, once it has finalised its takeover of the Belgian carrier. The latter's hectic growth slowed to 15%.

The drop in profit margins was not just due to declining yields. The surge in fuel prices hit all carriers, although some were protected by their hedging strategies. Lufthansa plans to hedge 80-90% of its fuel this year and those like Austrian which refrained from hedging are now looking to follow suit. All airlines warned that if fuel prices continued at their current high level, this would feed through into the bottom line in this financial year.

Outside the big three, Swissair also saw a significant improvement in yield in the second half of 1999 and analysts expect a recovery. Monthly yields have risen each month this year. Like some rivals, Swissair plans more restrained increases in capacity this year (2-3%). Even Lufthansa plans to cut growth from 12% in the first quarter this year to 6% over the next two years.

KLM cut capacity by 1% last year. The Dutch carrier is more reliant on lower yield transfer traffic than some neighbouring hubs and is particularly exposed to over-capacity on the North Atlantic, but its results beat the worst fears of most analysts.

Alitalia and Turkish Airlines were particularly weak performers. Alitalia had a turbulent year, with delays to development of its Milan Malpensa hub, while Turkish Airlines had an earthquake at home and war in nearby Kosovo.

Source: Airline Business