Report by Günter Endres in London
Analysis by Fabrice Tacoun
According to Eurocontrol, low-cost carriers added 2.4 percentage points to their market share last year, measured by flights controlled by the air traffic agency, to reach 16.3%. There has also been a marked upswing in the first few months of 2006, putting further pressure on the short-haul services of legacy carriers. In combination with continued high-fuel prices, mixed results from cost-cutting exercises, and industrial unrest, this difficult operating environment has ensured that legacy carriers continue to struggle.
Only two of the European majors posted net profits in the first three months of 2006, and while it is accepted that this is traditionally the weakest quarter of the year, low-cost carriers have taken full advantage to twist the knife a little deeper. Nor does the blood-letting look set to end any time soon.
In sharp contrast, the full year result to the end of March 2006 at Ryanair illustrates the staggering progress made by Europe’s pioneering low-cost exponent. It posted increases in revenues – up by a massive 28.3% – operating profit and net profit, and although its operating margin declined a few points to 21.8%, it is still at a level that is the envy of the industry.
Of the major European carriers, Alitalia suffered the greatest reversal in the first quarter, posting an operating loss of $155 million and a net loss of $188 million. The result was affected by a series of industrial disputes in January, which impacted severely on its high-value traffic, with a consequent reduction in revenues, well below those forecast.
A slight increase in intercontinental and intra-European traffic was insufficient to cover market share losses on the domestic front, which led to a decrease in yield of 3.4%. According to Alitalia: “The negative repercussions of unsatisfactory operating performance with high-value customers have simply been added to a continuously evolving competitive environment characterised by the entry of new and threatening players and the aggressive market share strategies of incumbent companies.”
Its lengthy battle with Air One over the takeover of the Volare Group, which it eventually won in the courts, could also not have helped its cause in the early part of this year, although in the longer term, it has removed one of those direct competitors it has blamed for some of its woes.
On the positive side, Alitalia says, efficiency improvements outlined in its 2005-8 business plan, containment of certain (unspecified) operating costs, a lower than expected impact of fuel costs due to successful hedging, and a reduction in staff costs through consolidation of operations, have kept its financial performance at similar levels to that in the first quarter of last year.
Spanish flag carrier Iberia is also facing industrial unrest over plans to close all routes out of Barcelona, except for the Madrid shuttle, and to set up its own low-cost airline. The pilots union Sepla sees a clear link between the two, fearing job losses or a reduction in salaries. It has called a seven-day strike for July, which could lead to further action if not resolved quickly, and could have a knock-on effect on Iberia’s balance sheet.
Alitalia sees positives
Its financial position in the first quarter this year was already weaker than in the same period in 2005, with operating and net losses both worsening, in spite of a 7.9% boost in revenues. Still greater increases in revenues helped Austrian, Lufthansa and SAS to keep losses substantially the same as in 2005.
There are exceptions, of course. British Airways, is taking the fight to its low-cost rivals. It posted its second highest profit in the full year to March 2006, with the fourth quarter contributing almost 20% to the net income.
The use of technology – almost 90% of UK tickets sold are now e-tickets – a competitive fare structure, which reversed years of losses of its short-haul business, and a renewed emphasis on high-value traffic were fundamental to the airline’s fightback. In the fourth quarter (January-March 2006) alone, revenues improved by 13.2%, operating profit doubled, and net profit reached $140 million from break-even in the same quarter in 2005.
Air France/KLM achieved near breakeven in the quarter at the operating level. At the net level it made a profit, confirming, according to chairman Jean-Cyril Spinetta, “the success of the Air France-KLM merger. The synergies created by the merger, combined with our on-going cost-control measures have not only enabled us to attenuate the impact of the rise in fuel prices, but also to improve our margins significantly. At the same time, we have considerably reinforced our financial structure, while continuing to invest in improving the efficiency of our fleet.”
In the full year to the end of March 2006, Air France/KLM generated 10.2% more revenues, almost doubled its operating result, and increased its operating margin to 4.4%. Its net result compared to the previous year, however, was almost halved, although the group states that the figure represents a 29.3% increase before restatement for the KLM pension fund surplus.
KLM made a slightly higher contribution to the operating result, while Air France was responsible for three-quarters of the net income, due largely to a large gain from the sale of a stake in Amadeus.
Air France is facing increasingly aggressive competition from low-cost airlines in its backyard, a threat that is less acute for KLM, which has its own low-fare subsidiary. However, achieving further synergies between the two companies in this financial year is vital to keep low-cost rivals at bay. ■
Source: Airline Business
