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. 

FMI: www.frost.com