Travelmole Guest Comment: Global downturn reshaping European air sector

Euromonitor International travel and tourism analyst, Angelo Rossini, outlines how the global crisis is impacting European airlines.

“At the end of June 2009, IATA announced a further decline in world air passenger demand in May by 9.3%. Europe’s performance was in line with this, at 9.4%, and was particularly affected by a decline in long haul passengers. April and May marked a stabilisation in decline, however, IATA believes that demand may not yet have bottomed out and the road to recovery is still a long way off.

All major European airlines were hit badly by the global recession. British Airways was among the worst affected, compounded by the weak pound, announcing losses of £100 million in Q1 2009 with similar losses forecast for Q2.

However BA is not alone. Air France reported losses of EUR200 million for its year end March 2009 and Alitalia also expects a similar figure, recording a load factor of only 55% in March 2009, which was at least an improvement on 43% witnessed in January. Even Iberia, after achieving profits for the last 13 years, also recorded losses of EUR92 million in the first three months of 2009.

Lufthansa, after initially underestimating the impact of the crisis on its 2009 results, has recently acknowledged that substantial cost reductions through job cuts will be necessary to stay competitive. Its company results for the first six months of 2009 will be announced at the end of July and are expected to report significant losses as a result of the 6.1% drop in passengers recorded in the first six months of the year.

Low cost carriers less hit

Low cost carriers were also affected by the unfavourable economic environment, however, less so than their legacy carrier counterparts. Ryanair recorded annual losses of EUR185 million in March 2009 for the first time in 20 years, but this was due to the poor financial performance of its Aer Lingus shares, while its airline operations were still profitable by EUR105 million.

easyJet reported losses of £129.8 million for the six months ending March 2009, like others, mostly attributable to high fuel prices. However, passenger traffic results for both the main European low cost carriers were positive for the first half of 2009, favoured by growth in long breaks and by the rising popularity in low cost travel options as consumers seek value for money, trading down from schedule carriers. For these reasons, prospects for the second half of the year are less gloomy than for legacy carriers.

Consolidation as the answer to the crisis

The challenge brought about by the difficult economic environment resulted in an acceleration of the consolidation process by European airlines in order to implement synergies to reduce costs and return to profitability.

Difficult conditions impacting on both British Airways and Iberia are pushing the two airlines to overcome the difficulties which have so far hampered their merger. In order to speed up the union, Antonio Vazquez was appointed as the new chairman and CEO of Iberia on 9 July 2009.

Air France is also relying on its new partnership with Alitalia which is likely to lead to an acquisition in the mid term. It is also focusing on its joint venture with Delta in order to cut costs and generate new revenues, while monitoring possible opportunities for acquisitions in Europe.

Lufthansa, after the acquisition of bmi and the possible acquisition of Austrian – in case this will receive the go-ahead by the EU – is now accelerating its expansion in the Italian market through its newly created airline, Lufthansa Italia, based at Milan Malpensa airport.

Finally, on the low cost carrier front, Vueling and ClickAir merged in July 2009 to form the fourth largest European low cost airline.

The acceleration of the consolidation process is expected to strengthen the position of the main European airlines and prepare them to reap the benefits after the end of global crisis and the subsequent return of air passenger growth. Recovery is tentatively scheduled for the beginning of 2010, barring a further deterioration in demand in response to the escalating H1N1 flu pandemic.”