A string of one-off restructuring, labour relations, fuel hedging, and currency hits in 2014's fourth quarter – and in the year as a whole – makes for difficulty in unpicking the financial health of European carriers.
Take Lufthansa, the last of the European majors to have published details of its fourth-quarter performance, which flagged both full-year operating profit up a third and the near-wipeout of its net profits.
"Our results for 2014 show us clearly where we currently stand," says chief executive Carsten Spohr – the clear position being that, despite the group's profitability in what he terms "a far-from-easy year", investment in new aircraft and premium services means "we simply have to further increase our operating profit".
Further contradictions in the financial picture come from lower oil prices. While this gives airlines a welcome reduction in what have becoming hugely burdensome fuel costs for the year ahead, the irony is that its initial impact for many was a financial hit from previous fuel-hedging positions.
Complicating the issue further is the US dollar's strength against the euro, which caps the potential gains. For example, while Air France-KLM finance chief Pierre-Francois Riolacci expects the group's 2015 fuel bill to be $1.5 billion down on last year's, much of the financial benefit will be diluted by the dollar strength.
Overall, European carriers slipped from around breakeven for the three months ending December 2013 to a collective operating loss of $275 million in the last quarter of 2014 as one-off impacts took a toll.
Damaging strike disruption and currency exchanges effects widened Air France-KLM operating losses to more than $200 million in the fourth quarter. Norwegian too posted deeper losses in the three months to December 2014, after taking a fuel-hedging and currency hit in the quarter.
Even IAG – which was a standout performer last year and posted a fourth-quarter group operating profit of €260 million before exceptional items – was dragged to a small loss for the fourth quarter when one-offs were factored in. Those largely related to Iberia's employee restructuring costs and the continued currency hit on Venezuelan ticket sales.
It was a mixed picture for European carriers at net level in the fourth quarter. While at a collective level European carriers made a net profit compared with a heavy loss in the same quarter in 2013, this in large part reflected an almost $1 billion tax impairment charge Air France-KLM took in the fourth quarter of 2013.
Air France-KLM and IAG both posted fourth-quarter profits this time around. But Lufthansa's net loss of $527 million in the final quarter marked a negative swing of more than $600 million from the same period last year and contributed largely to the Star Alliance carrier group's reduced full-year net profit. Lufthansa cites a number of factors for this, including a fuel-hedging hit and a reduction in the market value of exchangeable notes for shares in US carrier JetBlue – which Lufthansa is redeeming earlier than previously planned as part of a debt-reduction effort.
For the full year at a net level, the fuel hedging hit at Norwegian and one-off costs at Aer Lingus relating to the settling of its long-running pensions deficit dragged those airlines to full-year net losses. While Air France-KLM pulled back its heavy full-year net loss, it was in the red at both net and operating level.
IAG contributed the bulk of 2014's European airline net profits for those with a financial year ending December – admittedly a list that excludes profitable EasyJet and Ryanair – and also improved its performance at an operating levels. Much of the attention was grabbed by the return to profit of its Iberia unit – understandable, given that it broke a run of six years of net losses. But the Spanish carrier's contribution and that of low-cost unit Vueling were dwarfed by the profit at British Airways. The UK carrier's operating profit jumped more than €500 in 2014 to reach reach €1.21 billion.
Of Europe's big network carriers, IAG is furthest down the path of restructuring, evident both in it setting out an operating profit target of at least €2.2 billion for 2015 and in its return to the acquisition trail with its pursuit of Aer Lingus. The Irish carrier too appears to have overcome many of its hurdles, notably settling its long-running pensions difference, and is back in growth mode.
However, Air France-KLM and Lufthansa are both continuing to work through restructurings with labour and the reorganising of their short-haul operations in particular. This leaves them with plenty of work to do over the year ahead. Lufthansa boss Spohr notes that the cost savings under the group's three-year Score efficiency programme – launched by his predecessor Christoph Franz in 2012 – are not enough to sustain the business. Now, he says, the group needs to make "structural" changes.
The Franco-Dutch carrier says more layoffs will "probably" be needed if the group is to reach its cost-cutting targets under the Perform restructuring plan. Without putting a specific number on the job losses, group chief Alexandre de Juniac says they will be on top of 800 additional redundancies outlined last month and set to be made by 2017.
Add to that the restructuring efforts efforts under way at Etihad acquisitions Air Berlin and Alitalia, challenges at Finnair – which slipped to a full-year loss in 2014 – and the widening of SAS's losses in the first quarter of its new financial year, challenges remain at Europe's network carriers.
On the low-cost carrier side, profits at EasyJet and Ryanair have been painting a bright picture for the current year. But while Ryanair lifted its full-year net profit outlook after a bright third quarter, it cautioned shareholders to "temper expectations" for the financial year ahead, with fuel-hedging strategy set to limit the Irish budget carrier's profit growth next year amid tougher pricing competition from unhedged rivals.
Norwegian, after hedging losses and delays to securing US approval for its controversial European subsidiary dragged it to a loss last year, sees "several positive trends". But boss Bjorn Kjos was already saying the carrier needed to "further reduce our cost level in order to stay competitive in a very challenging market" even before a damaging strike in March.
Central European budget carrier Wizz Air, meanwhile, provided details of its financial performance as it prepared to list on the London stock exchange, revealing a 48% rise in operating profit over the first nine month of its current financial year, to €176 million.
Source: Cirium Dashboard
