Leading off the latest round of reporting for the major European airlines, both KLM and British Airways have provided the first tangible evidence of the damage that overcapacity has caused this summer, especially on routes over the Atlantic.
But as is the nature of financial results, they represent the outcome of operating conditions in the recent past rather than prospects ahead. Although profit expectations for the 12 months have been reduced regularly as the year has progressed, it appears the bottom may be in sight.
There were some pleasant surprises from both carriers in their first-half figures to September. KLM held its yields flat, and although BA reported European yields down by 8%, the North Atlantic and Asia brought better news.
The phrase used by BA of "cautious optimism" for next summer sounds plausible, although markets are initially expected to remain unstable going into next year (perhaps persisting into the second quarter). That could be exacerbated by a lack of traffic during the ringing in of the new millennium.
KLM improvement
But before taking a look at the future, it is worthwhile revisiting the main conclusions from these latest results. KLM's revenue performance was better than expected. While pressures were significant in the economy cabin, a 5% increase in business class traffic and overall flat yields were clearly on encouraging development. KLM's near-term focus is trained on cost reduction more closely than most of its near competitors.
BA's first public breakdown of yields by region was good, but only in parts. The best were clearly the North Atlantic where the fall in the yield was just 2% despite the discounting going on all around. In part, this can be explained by the fact that the principal source of BA's yield problems over the past 12 months or so has been the collapse in prices at the lowest end of the economy fare sector and the increased element of this type of traffic in the total mix.
Within BA's total Europe-North America economy class traffic flows, the share of the lowest yielding classes - in large part transfer traffic - has increased from 51% of the total to 66%.
The financial consequences of this provide clear evidence of the merit of BA's revised strategy of tightening on capacity and refocusing on higher-yielding origin and destination traffic from London.
Transfer profits
While some transfer traffic is clearly profitable (both for the short-haul business and the airline overall), not least premium and fuller fare economy, low fare transfer traffic is clearly not.
This, in part, explains the 8% fall in European yields that BA experienced in the quarter, although the imbalance that has existed for some time in the European market was clearly a problem. Capacity growth in the region is up at the 7-8% level against underlying traffic demand of less than 5% according to the Commerzbank/Airline Business model (see last month's Analysis). Meanwhile, passengers continue to shift from the front to the back of the aircraft as more European companies question the need for their employees to travel business class on short haul - itself an issue for further examination.
The seat costs on BA's short-haul business appear to be averaging around ó22 per kilometre. Yet it is reasonable to calculate that the lowest yielding transfer traffic (travelling from Europe to the USA via London) will cover only 30-40% of that seat cost on the short-haul leg. By definition, any additional passengers of this type only increase losses - hence the new approach.
The latest results also tend to confirm the view that recovery is gathering pace in Asia. BA reports a 3% improvement in Asian passenger yields (admittedly from a low base) and comments that the South-East Asian market was improving fast.
While the performance over last summer may not be regarded as a "giant step for mankind", and while tough times will last into next year, it appears that the bottom may have been reached and the industry is on the way back. Attention will focus on how the industry behaves as a whole.
In the past, a spell of pain has been followed by a more rational period of capacity control. With luck, this time too, after the pain will come the gain.
Source: Airline Business
