European and Asian carriers continue to outperform their US cousins although, in Europe at least, there are worries that airlines may be hit this year by economic slowdown
European carriers saw a massive improvement in the September quarter, with the big three, Air France-KLM, British Airways and Lufthansa seeing operating profits increase by 40% on the year. However, this was against soft comparisons in 2003, with the war in Iraq and SARS taking their toll. Even so, there were some encouraging signs for the winter at least. "Yield is not a disaster," says Andrew Lobbenberg, analyst at ABN-Amro.
Throughout much of 2004, the likes of Ryanair warned that the winter would be a "bloodbath". However, in November Ryanair says that yields will not be as bad as predicted. "Despite intense price competition and our own considerable growth, the yield decline of 5% for the half year was at the better end of our 5-10% guidance," the carrier says. Some analysts believe the earlier yield warnings were partly aimed at rival low-cost start-ups and those that fund them.
Looking into next year, however, there are some clouds on the horizon. Chris Avery, analyst at JP Morgan, warns that 2005 will not have the benefit of soft comparisons, and warns that a weakening broader economic environment could hit the recovery.
Economic slowdown
"GDP is the raw material for the airline industry, and there are signs that Europe's economies will slow down in 2005," he warns. Many economists are pencilling in weak growth for Europe's big three economies, France, the UK and, particularly, Germany.
The tide of cost-cutting continues, but Avery warns that despite some recent good news on this front, including Lufthansa squeezing two extra hours a month out of its pilots and BA agreeing a deal with its unions on abuse of sick leave, this is not enough to drive the recovery forward. "You don't get your big cyclical upswings through cost-cutting," says Avery.
On the bright side, he notes that most carriers, including the big three, have been relatively conservative when it comes to capacity for the summer season. Fuel still remains subject to unpredictable geopolitical events but Avery says "it will go back to being a benign factor". JP Morgan expects jet fuel to be back down to $35 a barrel levels by April.
Asian airlines, meanwhile, continue to outperform their counterparts in other parts of the world with strong earnings reports despite higher fuel prices.
Across the region, major publicly traded airlines have been releasing solid earnings statements for the first half or third quarter to September, many of them far exceeding expectations.
Analysts are impressed and say the profit reports show how strong the Asian underlying operating base is. "Generally speaking, the results have been ahead of expectations," says Hong Kong-based JP Morgan regional airlines analyst Peter Negline. "Everyone in the region has been doing well, with some doing extremely well."
Earnings reports are driven by" revenues, revenues, revenues", he adds, which have been "extremely strong for both passenger and freight". Cargo is becoming significantly more important for nearly every airline in the region, he adds. "There is also strong resilience in the passenger side and yields are extremely good."
While Asian carriers have felt pain from high fuel costs, surcharges have for the most part been accepted by passengers.
Singapore Airlines is one that far exceeded analysts' expectations in its fiscal second quarter. For the three months to September it reported a 17% jump in net profit, proving wrong analysts who had generally been expecting a drop of 15-20% due to the impact of higher fuel prices.
Upbeat on Asia
Elsewhere, better-than-expected earnings reports also came from Malaysia Airlines, Taiwan's China Airlines and EVA Air and Asiana Airlines in South Korea. Korean Air suffered a sharp drop in third-quarter net profit largely as a result of increased fuel prices but its nine-month earnings represented a return to profitability and analysts are upbeat about its prospects.
In Japan, All Nippon Airways continued its strong run, citing increased demand and ongoing restructuring efforts for its fifth successive profitable quarter. Japan Airlines stormed back to profitability for the half, although it says the second half is looking weaker than expected and as a result it has reduced full-year forecasts.
By contrast, some carriers have upgraded profit forecasts although most are not resting on their laurels and are aggressively cutting costs.
The general feeling is they need to be able to cope better with unexpected shocks, such as last year's SARS outbreak, and better prepare themselves for new competition. This challenge is largely from new low-cost airlines.
Report by Colin Baker in London/Nicholas Ionides in Singapore Analysis by Fabrice Tacoun in London
Source: Airline Business
