While for European carriers 2016 has presented more than its fair share of external shocks, paradoxically it is set to be the most profitable year in their history.
IATA – in its latest industry outlook, issued in December – projects that European carriers will post collective net profits of $7.5 billion for the year. That figure is on a par with the profits enjoyed in 2015. But as revenues have fallen this year, given the lower yield environment and currency impacts, that profit would translate to European carriers' best profit-margin performance.
That profitable performance in part attests to restructuring and a relatively restrained approach to capacity since the financial crisis. But crucially it reflects the welcome impact of a step-change in airline costs as a result of an external factor: the oil price fall.
The benefits of lower fuel prices really only began to filter through to European carriers this year, as existing hedging fell away.
This has helped them to weather the various European storms that increasingly cloud the revenue picture. Terror attacks, weakening currencies, seismic political shifts and the great uncertainty caused by Brexit are external blows that would have knocked earlier iterations of the European airline sector well off course.
Those events, however, have still had an impact. Projected airline profits have been capped and carriers have been trimming back capacity plans as a result.
SHORT-CHANGED
Perhaps reflecting the wider economic uncertainty, relatively little has changed in the structure of the European airline sector. For most European operators – with the obvious exception of those in Turkey dealing with a sudden drop-off in demand in the wake of terrorist attacks and a coup attempt – the dynamic remains much the same as when the year began.
But for many, the status quo is far from welcome. Europe's network carriers in particular continue to find themselves under pressure.
Air France-KLM and Lufthansa Group began the year still seeking agreements with their unions to reset their cost bases against advancing lower-cost competitors. As the year drew to a close, Lufthansa was again engulfed in damaging pilot strikes and is still far from over its labour pains. Efforts in 2015 did not secure the productivity deals Air France was seeking and now new leaders – both at the French airlines and its parent group – must try again to rebuild relationships while realising savings.
In the absence of the required efficiencies, both have channelled growth into their low-cost units – perpetuating strained relations with mainline unions.
Etihad Airways' high-profile European assets have also not seen the changes they would have hoped for, as the Gulf carrier continues to pay a high price for market access to Germany and Italy. Neither Air Berlin nor Alitalia appear to have yet found the formula for some kind of sustainable profitability. Both have been forced to rethink their paths to profits.
In Air Berlin's case, increasingly more drastic measures have been adopted to try to turn around fortunes. That resulted in September's announcement that it was finally ditching its multi-model approach, shedding more than three-quarters of its network under a restructuring programme aimed at concentrating the business on scheduled network operations from Dusseldorf and the German capital. It is also halving its fleet to 75 aircraft in 2017.
Its leisure activities are being pulled into a new European carrier – as is its stake in Austrian leisure carrier Niki, which has been sold to Etihad. The Abu Dhabi carrier will "immediately" transfer Air Berlin's divested Niki stake to the new airline, while TUI will contribute its TUIfly division – including the 14 aircraft operated for Air Berlin.
Work on restructuring Alitalia will enter a second phase – the airline's board will meet again before the year's end to finalise what the carrier describes as the next stage of its business strategy, which reflects the "significant changes to market conditions" since Alitalia was relaunched in late 2014 with a goal of reaching profit in three years. Cuts to its short-haul fleet have been widely reported as being under consideration. And that is before possible impact from the fresh political uncertainty of Italian prime minister Matteo Renzi's resignation on 7 December.
LOW-COST PRESSURE
One of the factors adding extra pressure to the likes of Alitalia and Air Berlin is the continued expansion of low-cost carriers. Both EasyJet and Ryanair have actively expanded in Germany and Italy, heaping more pressure on the network carriers. Ryanair, in particular, armed with a fresh order of Boeing 737s, has continued to expand aggressively in Europe, contributing to relatively high levels of capacity in short-haul Europe.
But progress for Europe's low-cost operators has also been far from untroubled.
EasyJet, for example, suffered its first fall in full-year profits for seven years. Its revenue per seat fell as a result of higher capacity and "aggressive" pricing, a "cooling" of demand relating to customer confidence, and the weakening of the UK currency. Additionally, EasyJet's relatively high exposure to France – both in destinations and overflying – meant it was one of the harder-hit European operators by a series of French ATC stoppages during the year.
Another low-cost carrier, IAG operator Vueling, suffered a challenging year amid operational issues over the summer – disruption it believes it has acted to overcome.
IAG chief Willie Walsh attributed some of Vueling's problems to "overly ambitious growth" in certain markets, which brought "inherent" operational challenges, noting that it had been operating on the fringe of hard closures at some airports. This compounded issues the carrier was facing from the ATC strike disruption.
The most recent recruit to the IAG fold, Aer Lingus, continues to expand its long-haul offering alongside sister carrier Iberia, while British Airways' network expansion includes plans to take on Norwegian on long-haul routes out of London Gatwick.
NO SALES RUSH
IAG was among the most notable airline investments during the year – Qatar Airways raising its stake in the group to over 20%. Lufthansa opted to take up its option on the remainder of Brussels Airlines, under a plan to link it with the Eurowings operation.
But 2016 was largely a quiet year for airline deals in Europe – with several planned acquisitions struggling to get over the line or falling apart altogether.
Qatar Airways remains in the frame to take a stake in struggling Italian carrier Meridiana, but finalisation of the deal has been pushed into 2017.
Alitalia's proposed purchase of a 49% stake in Air Malta has made little progress amid consistent speculation the deal is off – though the Maltese government insists talks are ongoing.
Irish carrier CityJet, long linked with a move for Stobart Air, in December announced it had broken off talks.
Source: Cirium Dashboard
