The damage of the weak market conditions is finally showing through in Europe.
Results for the last quarter and half year ending June put them hard and cold into black and white.
Margins have taken a precipitous fall and revenue growth - although fairly robust for the some for the first half of 1999 - is completely flat in the June quarter.
Air France was the only carrier to buck the trend, turning a negative margin into a leading 6% profitability.
As for the general story of woe, there are some one-off reasons for it. A number of carriers, including Brussels-based Virgin Express, have suffered badly from the war in Kosovo. Air traffic control is also guilty of damaging the region's industry.
Yet the key problem remains yields, which over the summer declined "across the board", says Morgan Stanley analyst Martin Borghetto. "The North Atlantic is swamped with capacity," he says, while intra-European traffic is also suffering from low ticket prices set by airlines desperate to feed passengers into their long haul flights. Premium class discounting now months ahead, compared with 10-14 days previously, he says, adding: "That's unusual".
So far some carriers are keeping costs under control. In the first quarter BA unit costs fell by 2.9%, and Air France reduced them by 4.5%. But KLM's expenses increased by 1% and Finnair's by 8%.
Costs, however, are still benefitting from low fuel prices. At Lufthansa, fuel costs - which are the largest single expense for airlines - declined by 4.6% while most other costs, excluding labour, were between 6 and 10%.
"There is a big question mark over fuel," says Borghetto, adding that airlines could soon find themselves exposed on hedging in fuel.
To restore profits, few are contemplating actual cuts in staff, which is on of BA's solutions to reducing overheads and achieving a projected £1bn annual savings by 2000-2001.
BA is also leading on seat capacity cuts, for despite noise about controlling growth, no carrier has yet followed its decision to make an actual decrease in capacity.
Lufthansa - which projects full-year pre-tax profits in excess of DM1bn, ($530 million) and KLM - which, of the major carrier's has suffered the most - have tried to reassure investors by stressing ability to jointly cut costs and raise revenues through their respective alliances.
"Another issue is what is really happening in Asia.' says Borghetto, pointing out that it is still unclear to what extent Asian economies are recovering and therefore the return of much of the damaging excess capacity from the transatlantic market.
It is clear that, as Borghetto says, "lower capacity, lower orders and economic growth," are key to the improvement in the industry's fortunes. But, if luck is on the industry's side, how long will it take before the upturn is in sight?
"You might see a small turnaround in the winter. But the big breakthrough will be next summer," says Borghetto.
Source: Airline Business
