Frost & Sullivan: Fuel, Emissions Regulations, Economy All
Significant Factors
Three of Europe's major airline groups, Lufthansa, AF-KLM, and
BA-Iberia, are facing similar challenges in the European and global
aviation market, according to new analysis by Frost & Sullivan.
They have all seen their profits increase compared to 2008-9, with
traffic growing again, particularly across long-haul markets.
However, they also have to deal with high fuel prices, following
the Middle East crisis. Prices are reaching unsustainable levels,
at over $110 /barrel, at a time when most of the European airlines
are adding capacity in the hope of a rapid recovery in air
traffic.
Commercial aviation analyst Diogenis Papiomytis says with
European peripheral economies (Ireland, Spain, Portugal, Italy, and
Greece) in financial trouble, the Euro is also expected to lose
some of its gains against the US dollar. The exchange rates so far
have benefited European airlines, with income denominated in Euros
and fuel expenses in US dollars. As the US dollar becomes stronger,
fuel will have an even greater impact on their bottom line. He says
the earthquake in Japan and subsequent tsunami have had a
detrimental effect on airlines with substantial Asian operations,
such as Lufthansa.
According to Papiomytis' analysis, Lufthansa is the most
profitable of the three and its strategy of buying into smaller
airlines in West and Central Europe is without a doubt successful.
Nonetheless not all airlines under the Lufthansa Group are
performing well. BMI had losses of EUR 145 mln in 2010 and is not
expected to be profitable this year either. It was mostly impacted
by the North African crisis, as BMI restructured its network and
increased flights to Middle East and North Africa. Austrian
Airlines and Germanwings, both part of the Lufthansa Group, were
equally unprofitable, although we expect them to recover this
year.
Lufthansa has successfully implemented a cost reduction
programme and saw its traffic recover, particularly long-haul.
Nonetheless the crisis in Japan is affecting them, as they have
ambitious growth plans for Asia. We don't expect them to make any
more acquisitions this year, as the priority is to restructure its
existing subsidiaries and bring them to profitability.
Consolidating operations between Air France and KLM, although
profitable, it is still in the process of, he says. The focus now
is to restructure their European activities, increase the
productivity of its employees, establish new bases in France and
assess their future needs to make new aircraft orders. We expect
them to announce substantial orders at the Paris Air Show this
year.
Papiomytis says the British Airways - Iberia (IAG) focus, as
they just completed the merger, on paper, is to now consolidate
their operations across three main areas: Passenger, Cargo and
Maintenance. They have their separate divisions in each of these
areas, and apart from Passenger Operations we expect them to create
unified businesses for Cargo and Maintenance. That will allow them
to achieve synergies, but primarily to increase non-passenger
related revenues. BA's dispute with its trade unions is also a
major issue, particularly with the cabin crew. This summer will be
key in the negotiations.
Finally, for all three groups, a major concern is the upcoming
addition of aviation in the European Emissions Trading Scheme
(ETS), which would increase their costs further. Most European
Governments are also keen to raise aviation taxes, on top of the
ETS scheme, which would push many airlines into the red. Smaller
airlines will face more challenges, even the possibility of
bankruptcy, in the face of these added costs."
Diogenis Papiomytis is a Principal Consultant in Frost &
Sullivan's Aerospace, Defence & Security group, with extensive
expertise in the commercial aviation industry.