TravelMole Guest Comment: The future is not so bright

Western Europe’s air sales are forecast to show minimal growth over 2010-2015, highlighting the uncertainty faced by the region. 2011 will continue to prove challenging for legacy carriers as competition will be fierce over increasingly fare-conscious passengers. Nadejda Popova, Travel and Tourism Analyst at Euromonitor International, investigates the performance of major European airlines amid rising fuel prices and fragile economic recovery.

External factors
Airlines in Europe have been extremely vulnerable to external factors, including higher oil prices, labour disputes, geo-political, geological and economic events. Fluctuating oil prices remained one of the largest operating expenses for European carriers, limiting their capacity to grow and undertake route expansion.

In addition, the Eurozone crisis which started with Greece and spread to other small, periphery economies, with Ireland and Portugal also receiving bailouts, is now spreading to Italy and Spain which will impact the performance of European airlines and affect consumer demand.
The major European scheduled airlines, IAG, Lufthansa, AirFrance-KLM, have all recorded contrasting financial results for Q2 2011.

Strong results for Lufthansa
Despite the blow to Lufthansa from the volcanic ash cloud crisis in 2010, recovery from the incident was relatively quick due to pent-up demand, as travellers rearranged postponed trips and were lured by discount rates. For H1 2011, Lufthansa recorded EUR14.1 billion in total revenues, and an operating profit of EUR3 million, which represented an increase of EUR174 million compared to H1 2010. With oil prices rising, however it is likely that Lufthansa will limit capacity growth, retire older aircraft, rely more on ancillary revenues, trim its fuel consumption and add fuel surcharges.

IAG on track
International Airlines Group registered improved financial results in H1 2011, with a pre-tax profit of EUR39 million, compared to a loss of EUR419 million for the same period in 2010. The Group also recorded an operating profit of EUR88 million in 2011, set against an operating loss EUR309 million in H1 2010. This was mainly driven by the improved performance of BA and returning business customers on its route to North America. The increase of oil prices, however, led to a sharp rise in fuel costs for the Group, reaching EUR2.4 billion in H1 2011.

AirFrance-KLM worst performer
On the other hand, Air France-KLM registered revenues of EUR6,220 million for the period April-June 2011, compared to EUR5,721 million for the same period in 2010, recording an operating loss of EUR145 million in Q2 2011, being one of the worst performers in Western Europe. The volcanic ash incident in April 2010 contributed to its poor performance in the region.
Staff disputes, following the introduction of cost synergies, provoked strikes, affected Air France-KLM throughout 2010. The financial stability of the airline was further aggravated by the political turmoil in the Middle East and the tsunami in Japan.

Not so bright future
In response to the on-going European debt crisis, a slowdown in economic growth could undermine demand for air travel, especially from lucrative business travellers. As the largest expense for airlines, fuel prices will be key in determining whether or not airlines will grow. Price wars are likely to continue on certain routes where there is excess capacity and companies seek to knock each other out of the market.