Asian carriers are keeping their heads above water, but Europe is showing signs of slipping backwards, write Colin Baker and Nicholas Ionides.
The last quarter of 2002 saw contrasting fortunes for Asian and European carriers, with the former continuing to be the strongest air transport market, while European majors became increasingly downbeat.
When they reported their first half figures for 2002, Europe's majors were cautiously optimistic that the worst was over and that 2003 would see a recovery, albeit a gradual one driven by cost reductions.
As the early year-end and December quarter figures come through, it is clear things have changed as mainline carriers suffer from war fears and the associated economic uncertainty. Finnair is a typical example. "After 11 September, there was a gradual recovery through the spring of 2002. However, this stagnated in the autumn," says Finnair president Keijo Suila. This led to stiff price competition. "As a result, we saw yield erosion towards the end of the year. Without cost- cutting, we would certainly have been in the red."
What is worrying for the industry is not so much that 2002 was so bad, but the lack of any signs of a significant recovery in 2003. "The industry outlook is poor," says Dominic Edridge, financial analyst at Commerzbank. "Considering the current industry operating environment, let alone possible geopolitical risks, we can only see negative catalysts in the first half of 2003."
As they recognise that meaningful recovery may take longer than previously envisaged, carriers are responding by cutting capacity for 2003. Swiss, Lufthansa and KLM all announced capacity cuts in March.
The impact of the economic and geopolitical problems is being tempered by the cost-cutting measures. British Airways is a notable example, with unit costs improved by 9.4% in the December 2002 quarter compared with the corresponding quarter in 2001, including a 5% improvement in labour costs and a 15.5% reduction in engineering and maintenance costs.
Looking forward, carriers are increasingly concerned that the drop-off in business passenger yields may actually be a structural change rather than just a symptom of the economic malaise. Aer Lingus and Finnair are just two carriers to have stated this recently, although Finnair's Suila says this is a short-haul rather than a long-haul phenomenon. "This pricing pressure may not be just a bottom of the cycle issue, but rather a permanent change, as customers seek out the best fare - with the Internet being an important weapon in their arsenal for cost control," Says Commerzbank's Edridge.
It is a different story in Asia, where plenty of black ink is flowing from airlines which are continuing to buck global trends by posting strong financial results. Airlines across the region have reported improved financial performances in recent months and the familiar stories have been successes in bringing down costs coupled with improving market conditions, notably on the cargo side.
In Hong Kong, Cathay Pacific reported a more than six-fold increase in net profit for 2002, as passenger and cargo demand improved and operating costs were reduced.
In Taiwan, EVA Air stormed back to profitability in 2002 after 2001 losses, largely on the back of strong cargo revenues and a recovery in passenger demand. Main Taiwanese carrier China Airlines was also solidly profitable for the year on the back of revenue gains.
In mainland China, China Eastern and China Southern Airlines reported solid rises in passenger and cargo traffic for 2002.
In South Korea, flag carrier Korean Air beat full-year earnings forecasts despite falling into the red in the December quarter. The full-year gain marked a turnaround from sizeable 2001 losses.
In Australasia, Air New Zealand (ANZ) reported continued success in its restructuring efforts with a return to profitability in the first half to December. It benefited during the period from lower costs and improved market conditions.
Qantas Airways also reported solid first-half profits. Much of the gains were due to a stronger performance from international operations, but both Qantas and ANZ also warned that uncertainty over the situation in the Middle East was having an impact on forward bookings.
For the most part, airlines in the Asia-Pacific cautioned that whatever happened in the Middle East would affect business, although they were generally bullish in terms of their prospects beyond that. As summed up by Cathay chairman James Hughes-Hallett in unveiling his carrier's strong 2002 results: "The outlook for 2003 is somewhat clouded by the current political and economic uncertainties, but we remain confident about our long-term future."
Source: Airline Business
