ALEXANDER CAMPBELL / LONDON
Falling passenger numbers and low-cost competition is wreaking havoc on mainstream European airlines
Quarterly results released last week by three of Europe's major airlines brought little cheer to an industry now sharing the travails of its American counterpart. Alitalia, Iberia and Lufthansa announced falling earnings, warning that the full-year figures for this year could be even worse.
In relative terms at a rate, Alitalia was least affected, reporting only a slight worsening to losses of L289 billion ($131m) compared with L283 billion for the first nine months of last year. Iberia's earnings fell 41%to €36.7m ($32.4m) for the quarter, and Lufthansa reported earnings of €290m, down 63%. All agreed, however, there is worse to come and have embarked on cost-cutting - and job-cutting - programmes to control mounting losses before the end of the year.
Most major European carriers have now produced their first results since the outbreak of war in Afghanistan, and the overall effect is disastrous.
With passenger numbers falling, especially in the critical premium-fare market, carriers have been forced to cut costs.
Largely devoid of union opposition many leading airlines in Europe have already decided to cut jobs heavily. Iberia has now joined the growing list, with 2,516 staff going and Alitalia numbers will be cut by 6,100. Lufthansa is still negotiating with its union in an attempt to avoid forced redundancies - it hopes to be able to survive with voluntary pay cuts and reductions in working hours. Air France has not so far announced job losses, but BA, KLM and SAS are all cutting several thousand jobs each.
Airlines are also reducing capacity by 10-17% by cancelling routes and grounding aircraft. Lufthansa has withdrawn 43 aircraft from service, including all eight of its ageing Boeing 747-200s, which will be mothballed. Others have done the same. Many of the aircraft may never return to service - for example, SAS is grounding 21 Boeing 767s and McDonnell Douglas DC9s, most of which will be retired. According to one aviation analyst, grounding older aircraft means airlines will buy or lease many more new aircraft as soon as passenger demand starts to recover.
However, airlines like Aer Lingus attempting to meet immediate expenses, such as redundancy payments, by selling aircraft may be in for a shock. With airliners piling up in the boneyards, resale prices are tumbling. Europe's low-cost airlines are using their profits to re-equip with more modern types at rock-bottom prices. Mainstream airlines like Lufthansa and SAS, meanwhile, are pushing back their orders of new aircraft like Airbus A380s and 747-400s.
With falling passenger numbers, major airlines are under pressure to boost revenues by raising prices. According to a survey by American Express, however, they have not been able to do so within Europe because of competition from low-cost carriers jockeying to increase market share. Airlines have been forced to cut leisure fares to North America by over 20% in order to lure reluctant tourists back into the air. Against a background of heavy capacity cuts transatlantic business fares have already risen by up to 10%, and analysts believe business fares will continue to rise as the crisis goes on.
The most important factor is uncertainty - BA, Lufthansa and SAS agree it is impossible to predict the picture in three months' time. Much will depend on the extent of the economic slowdown and the progress of the war. But if traffic does not start to recover, more cutbacks and lay-offs are inevitable.
Source: Flight International
