How Europe’s major airlines fared in key third quarter

Air France-KLM among six carriers to boost operating profits for the July-September period.
While high fuel costs continue to cloud airline fortunes, strong demand and yields helped European carriers largely protect – and in some cases enhance – profits in the peak third-quarter season.

With hopes dashed of an early end to the conflict in the Middle East, and with it any respite in surging energy costs, the third quarter proved another challenging one for airlines globally.

However, the same factors which helped mitigate the impact for European carriers in the second quarter were again in evidence in the July-September period. Their relatively high hedging levels took the edge off the immediate pain of higher fuel prices, while demand has remained robust – including in the Europe-Asia-Pacific long-haul market amid continued disruption to Gulf hubs.

At the same time, carriers had more time to effectively redeploy capacity than when the crisis first hit, while a greater portion of their inventory could be sold at higher fares as there were fewer seats sold at pre-crisis levels.

FlightGlobal analysis of July-September results for 10 leading European airlines and groups shows collective revenue increased 5.6% in US dollar terms for the third quarter – though the growth rate is closer to double that when factoring in exchange effects amid the weaker euro against the US dollar.

Significantly, collective operating profit in US dollar terms was only 5% down on the same period last year and net profit was almost unchanged.

It means Europe’s biggest carriers have still been able to bank strong profits in what is their most lucrative quarter of the year.

Air France-KLM bolsters profits

Air France-KLM turned in a particularly positive third quarter, even with the added impact of disruption related to protests in Paris in September. The SkyTeam carrier group lifted operating profit 18% in the third quarter to €1.45 billion ($1.62 billion), with all three of its airline units – Air France, KLM and Transavia – reporting an increase in profits for the period.

Lufthansa Group, too, improved profitability, increasing operating profit 9% to almost €1.5 billion – and by 5% to over €1.4 billion on an adjusted basis. That performance was supported by strong contributions from its MRO and cargo units, while the group’s passenger airline operations fell short of the previous year’s operating profit on an adjusted basis – due to lower profits at Germany’s Lufthansa Airlines. The group’s net profit climbed 30% to €1.26 billion.

Finnair, which was the only one of these eight European airlines or groups to improve profits in the second quarter, did so again in the third quarter. The Finnish carrier’s operating profit climbed 65% to €84 million while net profit almost doubled to €66 million. Notably, the carrier in October raised its full-year guidance to a profit range of €175-220 million.

Icelandair Group, too, reported an improved performance for the third quarter. The Icelandic carrier lifted operating profit 62% to $120 million and its net profit by $40 million to $97 million.

Wizz Air and Pegasus Airlines also both lifted operating profit slightly in the quarter. Central European carrier Wizz increased operating profit 9% to €448 million, on revenues up a fifth, while Turkish operator Pegasus recorded a 4% rise to €289 million.

Profits slip at IAG, Ryanair and Turkish Airlines

Elsewhere, British Airways and Iberia parent IAG saw profitability slip in the third quarter. IAG, which also includes Aer Lingus and Vueling, posted an operating profit of €1.7 billion in the July-September period. That was down 16% on the third quarter last year. IAG net profit fell 12% to €1.2 billion.

Low-cost giant Ryanair posted the largest operating profit of any European carrier in the quarter, finishing the July-September period – the carrier’s fiscal second quarter – €1.8 billion in the black. This, though, was down 7% on the same period a year ago, while net profit similarly fell 7%.

Turkish Airlines expects to lift capacity 3-5% in the third quarter. Source: Turkish Airlines.

Likewise, Turkish Airlines posted strong profits but down on the same period last year. Operating profit slipped 12% to $928 million in the third quarter, while its net profit fell 6% to just under $1.3 billion.

Low-cost carrier group Norwegian also reported a fall in profitability for the third quarter, though it says its operating profit would have been almost unchanged but for one-off gains in the same period last year.

Moving to full fuel recapture

One of the key metrics to watch for during this crisis has been the extent to which airlines have been able to pass through or recover increased fuel costs through higher revenues.

Air France-KLM group chief executive Ben Smith cites a number of factors for the group managing to deliver yields and revenues that outstripped the impact of higher fuel costs, including its ongoing premiumisation programme.

He also attributes some of the strong performance in terms of fuel cost recovery to the strength of the Paris market. “There’s no market like it where you have such a luxury leisure component where price elasticity is very unique,” he says. “Even with the situation we’re seeing in Paris with the protests, it is very resilient.”

IAG chief executive Luis Gallego says the group continues to see strong pricing power but that the ability to recover fuel costs through higher fares differs across airlines and markets.

“In the case of British Airways, for example, for the full year the pass-through is going to be around 100%. But you cannot expect the same when you are operating, for example, in the intra-European [market],” he says.

Turkish Airlines, which has reduced capacity to the Middle East by around 30% over the first nine months of the year, was able to claw back around $850 million of the roughly $1 billion additional fuel costs through switching capacity to other markets with stronger demand. During the third quarter Turkish Airlines lifted passenger yields almost 10% year-on-year, while load factor climbed 1.5 percentage points to 87.1%.

The carrier was also buoyed by a particularly strong cargo performance, as revenues in this segment jumped 45% in third quarter.

Lufthansa Group, meanwhile, remains confident that the strong underlying demand environment will ultimately enable the group to fully offset higher fuel costs.

“Our ingoing hypothesis is, with the demand that we see on the customer side, we’ll pass on fuel cost into ticket prices ultimately,” says Lufthansa Group chief financial officer Till Streichert, citing strong yield development and bookings for the fourth quarter and into next year.

Keeping capacity in check

While there was money to be made in the peak summer season, the continued high fuel cost environment means airlines are taking a more cautious approach in the of

Source: www.flightglobal.com — article syndicated from the publisher’s feed; all rights remain with the original publisher.