European carriers enjoyed a better than expected start to 2007 but concerns are growing that they could soon run into turbulence.
Nearly every European carrier reported better results for the first three months of 2007 compared with the first calendar quarter of 2006. Four flag carriers moved from the red to the black: Finnair, Iberia, Lufthansa and Turkish Airlines. Air France-KLM and Swissair saw their profits grow compared with last year. Several carriers were in the red but narrowed their losses, including Air Berlin, Alitalia, Austrian, CSA, Icelandair and SAS.
A stronger than anticipated economy drove yield improvements which fed to the bottom line. The better than expected performance in Europe, in particular on long-haul routes to Asia, even persuaded IATA to raise its 2007 profit forecast for the entire industry by over 30%. "Business travel between Asia and Europe is particularly strong," says IATA chief economist Brian Pearce.
Austrian, for example, reported a 9% increase in business-class traffic on long-haul despite a capacity reduction. The carrier cut losses in the first quarter by over 50% and says it has begun reaping the benefits of its recent restructuring.
In reporting a small profit for the quarter, Finnair also cited strong traffic on its Asian routes and growing market share on Europe-Asia routes.
Lufthansa credited "high demand in intercontinental traffic and for premium products" in reporting its first first-quarter operating profit in four years. Chief executive Wolfgang Mayrhuber says he is confident Lufthansa will meet its earlier stated target of a €1 billion ($1.3 billion) operating profit for 2007 "if the current positive framework conditions remain intact".
But that may be a big if. Lufthansa has not yet warned about a softening market but several European analysts and some European carriers have, including Ryanair.
The Irish low-cost carrier surpassed expectations by reporting a 31% increase in profits for the year ending 31 March, driven by a 32% spike in revenues and a 7% improvement in yields. But Ryanair predicts ticket prices will drop this year as it responds to market softness with fare sales and warns that it may incur a loss over the winter. As a result, it expects profits to only grow by 5% in fiscal 2007/08.
"We have a very conservative outlook for the next 12 months," says Ryanair chief executive Michael O'Leary. "The market is soft, yields are soft."
O'Leary adds the softening arrived unexpectedly after a benign first three months of the year. He says it is difficult to know why the market has softened but cites interest rate rises, the doubling of the UK's air passenger duty, increased airport charges and the continuing fall-out from increased security measures at airports as possible factors.
The environment, and negative publicity surrounding aviation's contribution to carbon dioxide emissions, is another potential factor. "I am concerned about the continued media hysteria," says Ryanair deputy chief executive Howard Millar. "There's a little bit of an agenda out there. It is impacting at the edges."
British Airways, which was one of only a few European carriers to report a slide in its quarterly earnings, also says the higher APD tax and increased security measures is having a softening effect on short-haul traffic.
BA remains confident it can meet its target of achieving a 10% operating margin for the year ending 31 March 2008, up from the 7% it reported for the year to March. But it warns revenues may not grow as much as earlier forecasted because of lower demand for transatlantic economy class services and weak demand on domestic routes.
Merger benefits
Air France-KLM also remains bullish for the year ending 31 March 2008 as it continues to reap the fruits of its merger. Air France-KLM chairman Jean-Cyril Spinetta says: "This past year has demonstrated the benefits of our profitable growth strategy. We have taken advantage of global growth to develop our business in all major markets and increase our profitability through cost control."
In reporting a smaller loss for the first quarter, German low-cost carrier Air Berlin credited progress in the integration of DBA, which it acquired last year.
Turkish reported an almost ten-fold increase in its operating profit. Chairman Candan Karlitken is confident of further improvements as it starts to enjoy the benefits of Star Alliance membership, which it joins early next year.
SAS narrowed its first quarter loss by 96%, benefiting from higher yields and cost reductions. But one month after it reported its first quarter earnings SAS unveiled a new strategic plan aimed at improving the carrier's long-term productivity.
Source: Airline Business
