The results season in Europe is now well underway and although at these times it is not necessarily the historic numbers that are of interest, as the guidance that is given to the stock market generally means there are few surprises, this has not always been the case this time. Given that the results will only tell us what has happened, it is management's views of the future which are more revealing.
A review of the announcements to date shows it is possible to put them into a number of categories. There are those airlines that want to focus attention on the very near-term and those that are prepared to look further ahead. In the former case it is often difficult to know whether management's apparent reticence reflects the fact that they have no firm view, or that they have chosen "discretion rather than valour" in that it is perhaps too difficult to give a perspective on what might happen. We all have a different view on how the next few months will develop. The reality is that the outcomes we forecast will depend on the assumptions we make.
At British Airways the attention appears to be focused on the remaining few weeks of the current financial year and the move into Terminal 5. The only real recognition of what might lie ahead is related to the price of fuel. An unkind cynic might suggest that the announcement of the transatlantic Airbus A318 service was timed to divert attention from what has all the characteristics of becoming a more difficult operating environment.
The recognition that a record final quarter is needed to reach the targeted 10% operating margin shows one of the nearer term challenges. The slowing economy and changed dynamics of the North Atlantic market following Open Skies will inevitably result in pricing and traffic pressures in the longer term.
On the other hand, Ryanair's management has effectively taken the final quarter of its financial year to 31 March as a given and focused attention on the next year, where it says it is "too early to make any accurate forecasts in such volatile markets for 2008/09". While there are many different perspectives on just how difficult it might get, Ryanair has given outside observers the opportunity to apply their own assumptions. What was a little surprising was that it was only after Ryanair came out with its view of the future that we saw some analysts reduce their own expectations of the company's outcomes for next year.
Conversely, easyJet's management in its quarterly statement reiterated the view that for its financial year ending 30 September, there would be "an improvement of around 20%" in underlying profit before tax. It appears that ancillary revenue and in particular the checked bag charge introduced at the start of the current financial year is an important element in this calculation. Notwithstanding this, comments regarding the uncertain macroeconomic environment, cost pressures and falling load factors may lead some to conclude that this is a bold statement to make at this time.
Overall carriers are putting out mixed messages. My view, for what it's worth, is that there are some real risks on the downside but what that means in the near-term and for the forecasts made depends on how close the assumptions are to reality. This is where the real challenge lies. On balance it is probably a case of preparing for something a little worse and hoping for the best.
Are we now facing a cyclical downturn which is coinciding with a structural change in the growth of the total market? The reality is: who knows? But it might be something to contemplate when considering what assumptions to use in any near-term forecasts.
Source: Airline Business
