Why are European airlines reticent to make long-term forecasts? asks Chris Tarry of CTAIRA, with analyses from Antonio Panariello of Flight Insight
The recent European results season gives an opportunity to review the position and outlook for the sector. Results, however, only tell what has happened in the reporting period. While generalisations are dangerous, most airlines appear to have continued to benefit from cost savings, including the impact of the weak dollar and, in the case of the legacy carriers, from still strong premium traffic.
Next year will likely represent the peak year for profitability, but a factor that has been conspicuous by its absence, at least among European airlines, is any indication from management of expectations beyond the current financial year. For what it is worth, there are increasing concerns on the revenue side of the profit equation.
Although in Europe easyJet, Air France-KLM, Finnair and Lufthansa have all been positive about the full-year outcomes, and the view at British Airways appears to be that reaching its 10% margin this financial year depends on a favourable external environment, SAS and Ryanair appear more sanguine. SAS chief executive Mats Jansson's comments are particularly apposite: "There are currently no clear indications of a slowdown in the economy or airline market, but uncertainty remains regarding the strength of growth."
However, few have ventured an opinion on what life might be like beyond the end of the current financial year. An exception to this is Ryanair, which expects "record profits" this year and forecasts that profits will double by 2012. Its business model, however, is based on an expanding network and structural growth from new routes rather than the performance of a network that is more or less constant, and where traffic and revenue are subject to the vagaries of the economic cycle.
For the most part, analysts expect earnings to rise and it is this which appears to drive the significant number of buy recommendations for airline stock.
There is little doubt that the performance horizon for stock markets becomes even shorter-term. Markets are dependent on changes in sentiment, which appears to have become increasingly fragile. They are also driven by two key factors, fear and greed, and they dislike uncertainty. The recent gyrations in the stock markets, which may well be a precursor to a more meaningful and sustained correction, ie a fall, have already had an impact on changing expectations, and the outlook is also less certain than it was before. This will affect corporate and consumer behaviour.
While we might like to think that the European stock markets are decoupled from the US, this is not the case. Whether the catalyst for a change in view is concerns over trading at WalMart in the USA or the exposure of banks across the world to sub-prime lending and the general tightening of the credit markets, the likelihood is that markets and sentiment will follow the USA's lead.
In this respect, sentiment has become less positive over the last few months and markets appear to have become even shorter-term and more volatile. Over the last few weeks the decline in the main European indices from their recent peaks has been greater than that for the Dow Jones index.
At an even more local level, the correlation between UK-US premium traffic, the stock market indices and the level of merger and acquisition activity has always been close. With this in mind, the change in sentiment and the availability of funding for large deals suggests that a decline, rather than just a slowdown, in the rate of growth in premium traffic is inevitable - even before any effect from new US immigration requirements.
Furthermore, it is not just volume that is important. Value is also important and, against a background of Open Skies and new competition, fares are only going one way. While good for travel buyers, this is unlikely to result in sustaining the overall size of the market, although there will be some re-distributive effects.
Historic results may contain good news regarding past performance but at times it is important to hope for the best and prepare for something less favourable. Despite the recent findings of at least one rating agency, it appears difficult to apply their conclusion that the outlook is indeed stable for the airlines operating in Europe.
Even if the peak in terms of profits is not reached until the next financial year, it is what happens after the peak that will become increasingly important and the focus of attention.
Source: Airline Business
