Crises leave trail of first-quarter losses

First-quarter results from European airlines demonstrated that the combined forces of the Iraq war, SARS and intense competition were hurting virtually all airlines - low-cost included.

Among the most closely followed results was an unexpectedly high half-year loss from easyJet. The carrier ended its first six months to March with a pre-tax loss of £24 million ($39 million). Yields were down by over 10% with an average sector fare of £37. The result is one of the first signs of financial stress among the lead low-cost carriers and put further pressure on the easyJet share price which has halved since late last year.

Chris Tarry, consultant at CTAIRA, argues that the fight back by the mainline carriers has targeted the kind of mid-market passengers that are a key element of the easyJet business model. By contrast, he adds, Ryanair has pursued an aggressive lowest-cost model, well below the prices at which network majors could compete.

EasyJet's load factors were actually up by 1.1 points to 82.2%, as the low-cost carrier cut ticket prices to attract passengers. Chief executive Ray Webster says that it is too early to predict the strength of fares over the summer ahead. "However, we expect to maintain high load factors, albeit with yields continuing to be under some pressure," he adds.

By contrast, British Airways was in upbeat mood as it revealed a net profit for its 2002/3 financial year to March, turning around the previous year's loss. The carrier says that the improvement was driven by its Future Size and Shape programme, launched early in 2002, which saw £570 million of savings in its first full year - £120 million ahead of schedule. The 11,880 reduction in headcount was ahead of the 10,000 target.

Chief executive Rod Eddington is keen to point to the progress made on BA's perenially loss-making European services, where the deficit was more than halved to £117 million for the year. That came despite the battle with the low-cost sector and BA's bold experiment to make short-haul discount fares widely available over its revamped website, without the traditional stay restrictions. Yields in Europe were down by 4.7% for the year, but load factors rose by 4 points.

The March quarter, however, brought some devastating figures for Europe's carriers as traffic spiralled down in the wake of the Gulf War and SARS. Systemwide yields at Lufthansa were down by a hefty 12%, while KLM saw a 10% decline, SAS 9% and BA just over 7.4%. That fed through to the bottom line, with the combined net loss for the leading flag carriers rising threefold to $1.3 billion for the quarter.

The heaviest loss came from Lufthansa, which recorded a huge €415million ($448 million) deficit for the quarter, and warned it will be in the red for 2003 as a whole. "Air transport worldwide is facing its greatest economic crisis ever. The situation has never been so serious," says Lufthansa chairman Juergen Weber.

"The word you hear time and time again at Lufthansa is unexpected," says Tarry, adding that the carrier was too optimistic at the start of the year, and as a result has too much capacity. In contrast, Tarry says that BA has taken a far more realistic approach.

Thomas Tomkos of Cell Consulting in Germany notes that Lufthansa has been focusing on three business areas which have all been under pressure: the Asia-Pacific market has been hit by SARS; the no-frills sector is experiencing a fierce price war within Germany; and the business jet concept, now being employed on the transatlantic, is not expected to see significant benefits for a year or two.

KLM, which posted a €252 million operating loss for the quarter, also says that it sees no upturn in the short term. "The current industry situation is unprecedented and we believe that the revenue environment has permanently changed. Our yields are decreasing and our cost base does not currently compensate for this development," warned chief executive Leo van Wijk.

Looking forward, carriers are understandably offering little in the way of forecasts, given the heightened threat of terrorism, continued problem of SARS and uncertainty on the timing of an economic recovery. BA speaks for most when it reports: "The outlook is that revenue in the June quarter will be lower than last year. Visibility beyond this is not clear."

Weekly statistics from the Association of European Airlines (AEA) show that by the start of May, traffic on Far East services was running at just under 30% below the levels of a year earlier. While the numbers look more stable there were few signs of any major rebound. "Evidently the SARS effect is as strong as ever, if not stronger," said AEA secretary general Ulrich Schulte-Strathaus, doubting reports that the outbreak was being brought under control.

Traffic on Middle East routes was down by more than 50% in late March as the Iraq war reached its climax. Since then there had been signs of improvement through to early May, although that was before a spate of terrorist bombings in the region.

The AEA also notes that traffic swings on the key European and North Atlantic markets remain "very volatile" with no clear signs of a sustained upturn.

Source: Airline Business