For European airlines profitability figures for 2008 made painful reading. While revenues among European carriers in the World Airline Rankings grew 9% across the year to $176.5 billion, essentially putting them on a par with North American carriers as the largest region, volatile fuel prices across the year and collapsing demand in the final quarter took its toll on profits. Operating profits among European carriers fell from $9.3 billion in 2007 to to $1.8 billion last year. At a net level the European sector ended $1.8 billion in the red.
European carriers in the form of Lufthansa, Air France-KLM and British Airways registered three of the top four highest operating profits in the 2007 rankings. But while Lufthansa again had the highest operating profit at €1.35 billion ($2.03 billion), in 2008 Turkish Airlines is the only other European operator to feature among the top ten operating profits with a $449 million surplus.
Few expect 2009 to make any prettier reading in Europe. First quarter figures, in which most carriers recorded an operating loss of some description, showed how tough it is.
Notably last year's most profitable airline group Lufthansa is embarking on cost savings measuresaimed at saving the airline €1 billion by 2011 as it bids to safeguard profitability. It was already braced for "considerably" lower operating profits this year . But, citing persistently weak passenger and cargo bussiness demand, structural changes intravel behaviour and rising fuel prices, it says new cost measures are now needed to ensure a profit for 2009.
The consensus among Association of European Airline airline chief executives during a recent spring assembly was market conditions show no indication of when the recovery might begin, and the impact of the downturn is expected to run well beyond 2009. AEA chairman and Croatia Airlines chief executive Ivan Misetic describes the economic downturn as "unprecedented". He adds: "This is not a cyclical feature. It is a structural upheaval, and we must adapt structurally."
British Airways chief executive Willie Walsh, whose own carrier saw operating margins drop from its heralded 10% level in 2007 into negative territory last year, has no doubt over the challenge facing the industry. "I've been saying for some time we have been facing our most difficult environment." Like Misetic, he highlights the structural changes facing carriers, particularly in premium markets. "Hanging on in there and just hoping for old high-roller times to return is the road to oblivion," says Walsh.
Away from premium markets low-cost carriers are hoping to benefit from passengers down-grading. Indeed it has long been a mantra of Ryanair chief executive Michael O'Leary that the lowest price will win out during a recession. Budget carriers though did not escape unscathed in 2008 either. Ryanair for example came badly unstuck on fuel hedging. But having hedged in a kinder fuel environment this year and allowing for limited visibility, the Irish carrier does expect to at least double net profits in 2009. Another low-cost operator, Norwegian, meanwhile has just disclosed record second quarter profits even with the tough environment.
The AEA maintains it is too early to say if the bottom has been reached, though provisional traffic figures from its members showing improvements in the second half of June and early July do at least give a glimmer of optimism after a dreadful May.
Even when a recovery comes airlines are braced for the return of an old foe in high fuel pices, which have already shown signs of creeping up. "We are absolutely certain that, within the next recovery, the oil price will explode," Lufthansa chief financial officer Stefan Gemkow says, citing likely over-demand caused by the timelag between economic recovery and the resumption of exploratory activity. "I'm 100% certain, again, we'll see higher oil prices than last year -perhaps not next year, but perhaps in 2011."
Source: Airline Business
