Europe’s airlines were largely profitable on an operating level in 2016, as low fuel prices and a strong focus on cost-cutting helped them towards profits, despite a weak yield environment.
In a sign that tougher times could be ahead, however, most carriers acknowledged that fuel costs were likely to be higher this year. In many cases, the last quarter of 2016 and the first of 2017 also saw a sharp fall in already troublesome yields.
The exceptions to the profitable picture were the two largest Turkish carriers – Turkish Airlines and Pegasus – which both swung to full-year operating losses amid political instability in the country and a weakening lira.
Turkish saw fuel costs fall nearly 11%, but costs elsewhere trended upwards. Passenger traffic increased 6%, while capacity outpaced the measure, rising by nearly 11% and negatively hitting load factors.
Pegasus noted a 30% fall in tourists visiting Turkey in 2016, which, combined with falling yields – by nearly 16% on international routes – left the carrier reporting an operating loss.
Even with yield challenges and a slight drop in revenues, Europe's three big airlines groups – Air France-KLM, IAG and Lufthansa Group – posted improved operating results for the year.
Air France-KLM continued to be a tale of two airlines, however, as the Dutch side of the business made a notably larger contribution to group operating profits than its larger stablemate.
Air France-KLM chief executive Jean-Marc Janaillac says the difference between the two carriers' results was "widening", but adds the launch of low-cost operation Boost is intended to help push results at Air France in a positive direction and back towards profitability parity with its partner.
Air France full-year profits fell by 13% to €372 million. A number of negative factors hit the French side of the operation, including industrial action by pilots and cabin crew and a perceived reluctance to travel to France after terror attacks in recent years.
Janaillac also pointed to Air France’s comparatively higher tax burden versus KLM.
KLM’s full-year operating profits was €681 million, up by more than three quarters year-on-year.
In its financial report, the group cited a “high level of uncertainty regarding unit revenue and fuel price due to geopolitical, economical and airline industry capacity environment” in its outlook.
Air France-KLM says fuel costs could be up to $100 million higher in 2017, based on current prices and its hedging portfolio.
For British Airways and Iberia parent IAG, an improved operating result came after a year in which the UK’s vote to leave the EU had threatened more serious negative effects. Nevertheless, the weakening pound – a direct consequence of the Brexit vote, if not a structural one – contributed to a €460 million currency impact.
Lower fuel costs helped offset negative factors such as declining yields, with unit fuel costs down 26% for the year.
In announcing IAG’s results, chief executive Willie Walsh acknowledged that capacity discipline was going to crucial in the near future, but also suggested “the best is yet to come” for the group.
Lufthansa Group reported a small drop in revenue but a higher operating profit for the full year amid a strong effort to cut costs. Industrial action from pilots in November had a €100 million impact, it says.
Budget unit Eurowings swung to a loss, which Lufthansa partly attributed to start-up costs and non-recurring expenditure as it builds up the umbrella low-cost brand.
Airlines in the group are expected to cut unit costs again in 2017, but it warns that a rising fuel bill and falling unit revenues are "unlikely to be fully offset” by those reductions.
“In 2017 it remains necessary to further reduce our costs,” says Lufthansa chief executive Carsten Spohr. “This is the only way to meet and master the decline in unit revenues and the higher fuel expenses, and at the same time to maintain and strengthen our financial stability and our investment capacities.”
SPREADING GAINS
Norwegian posted a big rise in full-year operating profit as the carrier continued to confound doubters. The rapidly expanding airline pointed to its growing international network and developments in the UK and Spain as key factors.
Falls in unit revenue was offset by decreasing fuel costs, as yield fell 5% year-on-year.
Norwegian’s fourth quarter saw a significant currency boost against a year earlier, but also a 14% decline in yields.
Elsewhere, Finnair converted its confident run of quarterly profits into another full-year profit, albeit slightly down year-on-year at an operating level. The company prefers to cite its “comparable operating profit”, however, which doubled to just over EUR55 million.
Finnair’s fourth quarter was affected by A350 pilot training, which meant it incurred costs in having to wet-lease aircraft to backfill.
Icelandair returned a full-year profit, but promised action to deal with a “very challenging” operating environment. Booking flow is trending downwards, according to chief executive Bjorgolfur Johannson, against a backdrop of rising competition and the uncertainty created by international geopolitical developments.
Johannson says the carrier will be examining its fare structure and increasing its product diversity as it looks to boost fortunes.
Ryanair was not immune negative factors either. The carrier - which adopts its a load factor active, yield passive approach - said fares were down 17% in the quarter ending 31 December, as its operating profit took a small hit on a year-on-year basis. Load factor, on an earned seat basis, over the same period reached a new high of 95%.
Chief executive Michael O’Leary cited the Brexit vote as a factor that had “exacerbated” the decline in yields.
The carrier managed to cut costs, excluding fuel, by 6% in the quarter, helping to offset that impact. Nevertheless, Ryanair says it is “cautious” on the beginning of 2017, particularly with the busy Easter holiday period falling outside of the first three months of the year, unlike in 2016.
It adds that a “sharp decline” in yields is expected over that quarter.
In one of the most stark warnings on yields, SAS chief executive Rickard Gustafson said its currency-adjusted yield fell nearly 12% to reach an “historically-low level” in the quarter ending 31 January.
The Scandinavian company saw its operating loss more than treble for the quarter, despite an 8% rise in revenue.
For its full year ending 31 October 2016, SAS’s revenue dropped slightly, with operating profit also falling.
Source: Cirium Dashboard
