Europe's mainline carriers produced a grim set of financial results in the second quarter to June, with operating margins more than halved from last year's levels.
Results suffered as the war in Iraq, SARS, the stronger euro, higher fuel prices and intense competition all took their toll. Carriers are not promising miracles for the third quarter either. A few, such as KLM and the Austrian Airlines Group, are hoping to break even, or even record a small operating profit for the year. Most are not. "Profit-wise, this will be a miserable year," says Finnair president Keijo Suila, speaking for many.
Yields in the June quarter remained dire, with revenues falling 9%, while there are also signs that capacity is starting to creep back despite the traffic weakness. In the first half of 2003, member carriers of the Association of European Airlines (AEA) added 0.9% seat capacity despite a fall in demand of 1.2%, with load factors falling by 1.5 points. Asia traffic, not surprisingly, was down 12.2% in the first half.
As Iberia warns in its quarterly report, mainline carriers have been shifting capacity to the more robust parts of their networks, and that, along with the increased pressures from the low-cost sector, has helped force yields down.
After last year's relatively robust performance, the leading majors ended the latest quarter showing a net loss of $231 million and staying barely above break-even at operating level.
Lufthansa, which had been showing the strongest profits last year turned in a net loss. It continued to suffer from the performance of its airline-related activities. Catering subsidiary LSG SkyChefs saw an operating loss of €106 million ($120 million) for the first half, while 50%-owned Thomas Cook continues to be a drain on resources.
British Airways swung to a net loss for the quarter with the cost of the wildcat strike by ground staff in July still to come in the September quarter. The airline expects this to be in the range of £30-40 million ($49-65 million).
Elsewhere, Finnair was badly hit by its exposure to the Asia-Pacific - its key long-haul market. SAS just managed an operating profit for the quarter but warns that it will be in the red for the full year. Alitalia's losses mounted although the carrier reports that it has been able to shore up its cash position thanks to a refinancing deal on its Boeing 777 fleet.
With little sign of yields improving, cost-cutting has become the key driver in improving the bottom line. Although this is beginning to show tangible results, with most carriers on track to meet their self-imposed targets, some areas are proving difficult to tackle.
BA reports that selling fees are down by 28%, aircraft lease costs down by 16.7% and engineering costs down 6%. However, employee costs were flat and fuel rose 7%.
Despite introducing a raft of cost-cutting measures, Lufthansa costs were down just 0.3% in the second quarter, thanks in part to the imposition of short working hours. This helped reduce staff costs by 3.3%. But this was a temporary measure that has now been lifted. Fuel costs were up 3.5% but would have added an extra €68 million if it were not for hedging. Carriers also saw navigation charges creeping up, and a number reported that increased security costs were starting to show through as well.
COLIN BAKER LONDON
Source: Airline Business
