Journey back to black still turbulent

Europe’s top 3 network airlines reported combined losses of over €2 billion this week. Hot on the heels of Air France-KLM reporting an operating loss of €1.285 billion (€3.5 million a day) for year ended March 31, 2010 almost double the loss a year earlier, BA this morning announced a record pre-tax loss of £531 million (approx. €610 million). These results do not take into account the impact of closures in April due to volcanic ash or in the case of BA losses as a result of cabin crew strikes in recent weeks.

Air France-KLM’s revenues for the year declined by 15% to €20.994 billion, while unit costs rose 4.9% or only 1% after stripping out currency fluctuations and fuel prices. Following the loss of traffic, particularly in the front of the plane, due to the global economic recession, the company said revenue trends were positive in both premium and economy cabins in the fourth quarter. The Franco-Dutch airline group scrapped its dividend after a year dominated by the global financial crisis and last June's Atlantic jet disaster.

BA’s pre-tax losses of £531 million, compared to a loss of £401 million a year earlier, came despite £1 billion in costs being stripped out comprising a £597 million reduction in fuel costs and a £390 million reduction in non-fuel costs. This shows the depth of the impact of the recession on BA’s traffic and revenue - passenger revenue for the year was down 10.9% to £7 billion, while yields fell 8%, despite signs of an upturn in the second half of the year. The carrier cut passenger capacity by almost 5%. Cargo revenues were down 18%, reflecting the fall-off in global trade and over capacity. BA reduced the payroll by just under 3,800 jobs within the year – more than 6,000 jobs have been cut at BA since September 2008.

BA as a long haul global carrier has been heavily dependent on high yield premium passenger traffic in first and business class – a strategy it continues to vigorously pursue with new upgraded fit-out and segment specific services such as the all premium London City-JFK service and its ‘OpenSkies’ Paris to New York & Washington DC services. There are positive signs that premium business travel is recovering although still far below its peak of a few years ago. According to IATA, demand for global premium travel finally returned to year on year growth in December 2009 some three months behind a pick up in general global economic activity. It was the first such increase in 18 months.

Lufthansa has reported a widening net loss of €298 million for the first three months of the year due to higher costs for fuel, strikes and bad weather, compared with a year-earlier loss of €267 million, even though revenue rose to €5.8 billion from €5 billion. The first-time consolidation of unprofitable Austrian Airlines and bmi helped Lufthansa increase first-quarter revenue but weighed on the company's operating profitability. The airline group had an operating loss of €330 million against a loss of €44 million in the equivalent January to March period in 2009.

A common thread in the statements from each airline is the need for continued cost reduction to achieve a restructuring of the business model for a global network carrier. This will be achieved by further cost reductions including increased productivity and headcount reductions; holding capacity or the number of seats on offer to better match demand to achieve higher load factor and yields; reducing short haul route flying. BA faces particular challenges with pending cabin crew strikes and the merger with Iberia. Lufthansa struggles with integrating and turning around its recent purchases – Austrian Airlines and bmi.

Irish carriers and services will not escape the impact of the difficulties of Europe’s largest airlines. In the short term fares can be expected to continue to creep up and we will be flying on fuller planes. The airline landscape will continue to change with most likely greater consolidation and an even more difficult time for smaller national carriers as competition with the ‘big boys’ increases.