European airlines have strengthened their tentative grip on profits in 2014, but restructuring remains very much a work in progress for many.
While their counterparts across the North Atlantic are enjoying a record run of profits, European operators are being made to work hard to secure what profit they can.
In its latest outlook, released earlier this month, IATA sees European carriers lifting collective net profits to $2.7 billion this year and to $4 billion in 2015. But this is still a small portion of total projected industry profits of $25 billion.
The key differences are economic – US airlines enjoying a bright backdrop – and structural. In the US market, consolidation has ushered in a period of capacity discipline and a climate in which airlines can make money. But it has still largely been seen only at the fringes in Europe, meaning some 200 airlines are still battling for niches and market share.
EUROPEAN MAJORS
Restructuring at Europe's big-three network carrier groups – Air France-KLM, IAG and Lufthansa – is at differing stages. IAG, which has issued new bullish long-term profit hopes, appears best placed after ending a year of labour pain at Iberia to secure potentially game-changing cost efficiencies to go with concessions previously won at British Airways.
But Air France-KLM and Lufthansa still seek labour changes as part of efforts to find a profitable formula for short-haul. Air France-KLM ditched its plan to expand its leisure unit Transavia beyond its home markets as part of a deal brokered to end a damaging pilot strike in September. It has agreed terms with unions – under which Transvia will expand in home markets France and the Netherlands – though pilot body SNPL appears to retain reservations. It is also revamping its short-haul operation through Hop. How successful these moves are in returning its short-haul business to profit remain to be seen.
Likewise, the jury is out on reforms at Lufthansa, which continues to face strike disruption. Having switched its non-hub short-haul flying to Germanwings – the last flights move across in January – the German group is now ruling out further growth of the budget brand without an improvement in its labour costs. It has decided to build up its Eurowings unit as a European low-cost operator and a platform to start budget long-haul flights from next year.
In the summer, both Air France-KLM and Lufthansa warned of transatlantic yields suffering as a result of sharp capacity increases – in part as European carriers focused on North Atlantic routes due to stiff competition from Gulf carriers on flights to Asia. Lufthansa was particularly affected after switching to larger-capacity aircraft. But long-haul largely remains the positive part of the business for Europe's network carriers.
"Europe's a real patchwork, in so much as you have a couple of majors that seriously have not addressed the problem, within Europe, of the cost of services in relation to their competitors," says Peter Morris, chief economist at Flightglobal consultancy Ascend.
"Nonetheless, that will probably be offset to some extent by positive growth on the long-haul and medium-haul networks," he adds, noting that despite Lufthansa's problems with strikes and yields this year, it has kept intact its profit forecast, at least for this year.
INVESTOR SEARCH
For many of Europe’s network carriers not affiliated to the big three, the search has been on for new investors. Alitalia secured its long-awaited new beginning after Etihad completed acquisition of a stake in the Italian airline. But the continued challenges at another Etihad investment, Air Berlin – where deeper cuts are being made – illustrates that an owner with deep pockets is not in itself a solution.
Portugal has relaunched the privatisation of TAP Portugal, hoping to secure a competition among potential bidders after Avianca parent Synergy was the only group to throw its hat into the ring two years ago.
Croatia formally restarted the hunt for an investor in Croatia Airlines in October, while Slovenia's privatisation agency will launch a tender for a stake in Adria Airways in the first half of 2015. Privatisation is on the agenda for Poland's LOT too, bolstered by an improved financial performance and this summer's European Commission ruling that state funding in the airline did not break state-aid regulations.
The fate of Cyprus Airways will likely hinge on whether the Commission's probe into ongoing restructuring plans for the carrier meet state-aid rules – a decision on which is expected shortly. Cypriot attempts to find an investor have faded while this issue hangs over it.
Europe's regional carriers continue to reinvent themselves and seek niche markets. Swiss carrier Darwin Airline – while still facing regulatory questions about Etihad's investment in the carrier – relaunched as Etihad Regional. Flybe has put London City at the heart of some of its new strategic development, while CityJet is hoping for fresh lease of life under independent management. Elsewhere, wet-lease operators Denim Air and VLM plan moves into scheduled operations, in the wake of management buyouts.
But the challenges of some regional markets were underlined when Flybe pulled out of its loss-making joint venture with Finnair, Flybe Nordic, selling its stake back to the Oneworld for a nominal fee. Finnair is seeking a new strategic partner for the venture, but also says it is examining the business model to ensure that it will be able to develop regional flying "in a financially sustainable way".
LOW-COST BUSINESS
Much of the pressure for network carriers on short-haul comes from European low-cost carriers drive to tempt business travellers onto to their aircraft. Strong results at EasyJet and a bumper start to the new cuddly Ryanair will further encourage these and other LCCs.
Ambitious Norwegian continues to grab its share of headlines – on both sides of the Atlantic – as it expands both within and outside of Scandinavia. Particular attention will be on whether it can confound critics and make the low-cost long-haul model work in Europe.
Outside the EU, the political crisis around Ukraine and sanctions that followed against Russia continue to have a significant impact.
Highest-profile, initially, was the aborting of Aeroflot's Dobrolet low-cost venture less than three months after launch, once EU sanctions were imposed as a result of Crimean operations. The Russian flag carrier launched its Dobrolet successor, Pobeda, this month.
Access to financing has proved a major headache for Russian and Ukrainian carriers and, amid sanctions and falling oil prices, Russia's economy is stalling and the continued weakening of the Russian rouble – in spite of dramatic recent hikes in interest rates – adds to the region's woes.
Falling oil prices do provide some encouragement for European airlines. But some of the cost advantages are wiped out by the strength of the US dollar, while hedging means the gains for some will not filter through until 2015.
Outside of Russia, the economic picture remains mixed in Europe. But there are some economies performing well and others that went to the brink at the height of the eurozone crisis, gradually returning.
"I wouldn't expect major shifts in demand from GDP movements," says Oliver Sleath, European airlines analyst at Barclays. "What will be far more important is changes in supply – airlines adding or removing capacity."
He sees airlines set to lift capacity around 3% in 2015 in Europe, outpacing GDP growth. "Fundamentally, that should put pressure on prices, on top of the possible impact of lower fuel. I think that is more important to airlines' performance than the macro environment."
Source: Cirium Dashboard
