No surprises as European airlines continue to decline

Victoria
By Victoria March 8, 2012 15:38

No surprises as European airlines continue to decline

Air France-KLM has reported a full-year loss with a warning that results for the current six months will show a further deterioration.

The airline posted a net loss of €809m ($1.06bn) from a pro €289m profit in 2010. Revenue at the carrier, increased 4.5% to €24.4bn and traffic was up 6.6%.

“2011 was a tough year due to the uncertain operating environment and high fuel prices,” the airline said in a statement.

Air France-KLM stated that it will increase capacity by no more than 2% in each of the next three years, with fleet spending also seemingly capped, there is also a pay freeze and hiring cap in place and talks are ongoing with unions. Union talks will last until the end of this month, and the company aims to have an agreement in place by the end of June delivering a 20% efficiency improvement by 2014.

Who are they kidding? Look at the US airlines and the airlines across the APAC region that is scrambling to copy them such as Japan Airlines – They are all able to adapt at speed and make price increases stick. Air France-KLM with its “plan” is not adapting at pace. It is a typical European airline lumbering along, talking a good game, thinking about the same for some time and then coming up with a plan by which time the goal posts have moved. It is not good enough and to a greater extent is poor management. The damming evidence in the detail today is the fact that unit revenues at the passenger business slid 1.2%. This means ticket prices are still sliding at the airline. Air France-KLM and all the other European majors already operate low-cost, long-haul businesses where the only low-cost thing about them is the ticket price and yet fuel costs are going through the roof.

If capacity is not cut in Europe and ticket prices are not increased at pace then airlines will have to collapse. Europe is still going in the wrong direction with airlines everywhere thinking it will not be them that fails. Many will argue that the first flag carrier to cut capacity will become the loser as the remainder raise prices and the low costs move to cover the gaps. To an extent this is true. But why do the European airlines not look at the US and Japan Airlines model(s) and apply them to their business and look to do the same on an intra-EU basis – more code shares is the order of the day. The first European flag carrier to adapt to the US airline model will clean-up. I fully expect this to be IAG, Willie Walsh is doing a great job and results this month prove that he has the airline with the costs under control. I would trust in Willie Walsh to have the guts to get out those JVs and slash and burn the number of aircraft on routes allowing ticket price increases.

Meanwhile, the Chinese government has raised domestic jet fuel prices to CNY7, 725 ($1,222) per ton, up 3.48% from CNY7, 465 per ton as the cost of international oil continues to climb. This is the second increase this year and was already announced to airlines yesterday, hence the warnings which we relayed about taxation hurting airlines in China. It would be an idea to keep an eye on performance of the big three in China as it does seem they are under a great deal of pressure with falling passenger numbers during 2012. Capacity in China may need to be cut before long and this decision will no doubt come from central government, we understand that they are watching and considering a move by year end unless numbers start to increase.

Victoria
By Victoria March 8, 2012 15:38
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