Europe's carriers as a whole saw net profitability almost wiped
out in 2011. This year has already witnessed high-profile airline
casualties, and the Association of European Airlines (AEA) projects
operating losses among its members of around €1.5 billion ($1.8
billion). Traffic and economic growth forecasts for large parts of the
region are flat or negligible. And all this assumes that governments can
resolve the sovereign debt that hangs over the region.
"2012 was
predicted to have a gloomy, uncertain economic outlook," says AEA's
acting secretary general, Athar Husain Khan, "and our forecasts are
proving to be accurate."
The climate of course differs by country
and carrier. Airlines operating in fast-growing European markets outside
of the EU, like Turkey and Russia, grew strongly in 2011. And within
the EU, low-cost carriers have, in the main, kept a grip on
profitability.
It is network carriers large and small within the
EU that are feeling the sharpest pressure. Europe's big three network
carrier groups -
Air France-KLM, International Airlines Group and
Lufthansa
- are all restructuring parts of their businesses, notably in
short-haul operations. The financial figures for all three have, to
differing extents, been weighed down, not just by higher fuel costs and
the weak climate, but by under-performing parts of the business.
Lufthansa's
net results were hard hit by costs associated with loss-making BMI -
and its sale to IAG. Iberia's performance within the latter group lagged
behind the robust
British Airways performance, while
Air France contributed largely to the group's overall operating loss last year.
At
the other end of the scale, the tough environment, combined with a
regulator clamping down on state-supported excesses of the past, makes
survival the name of the game for many mid-sized European operators.
Many cannot confidently predict that they can do so alone. Malev,
Spanair
and Cimber Sterling have fallen by the wayside already this year. Small
wonder foreign investors, such as Etihad, which has already helped to
rescue Air Berlin, are in demand.
The difficulty for these
carriers is that there appear to be many more airlines on the block than
suitors. Europe's big carriers are busy getting their own houses in
order, leaving them with little investment appetite for anything other
than strategic no-brainers - such IAGs move for Heathrow-slot-laden BMI.
This leaves most of the potential saviours coming from outside the EU. There has been some activity. Gulf carriers Etihad and
Qatar Airways - through its investment in
Cargolux - have already shown an interest.
Turkish Airlines is also an active observer, though it was dissuaded from investing in
LOT Polish Airlines by the limitations in foreign ownership levels by non-EU carriers and quickly distanced itself from moves to invest in
Aer Lingus for similar reasons.
Aer
Lingus is one of a number of small or mid-sized European carriers where
stakes are on the market. It is though in the enviable position - or
unenviable depending on your perspective - of having at least one
declaration of interest already from a bidder in the guise of existing
shareholder and noisy neighbour
Ryanair.
Amid
this tough environment, attention has again turned to tackling costs.
Air France-KLM's Transform 2015 programme aims to cut its net debt by €2
billion; Lufthansa is targeting €1.5 billion in efficiency gains by
2014;
Finnair aims to save €140 million by 2014; SAS aims for SKr5 billion ($749 million) in savings during 2012-13.
"If
you look at the really successful airlines, the carriers that are
thriving, a combination of network and low-cost carriers, are those with
an unrelenting focus on costs," says Emre Serpen, head of airline
practice at the Intervistas Consulting Group. "[The challenge is to]
keep reducing costs, focus on quality and give enough difference to the
customer. Decide what your strength is. That's where the good CEOs come
in. They manage to maintain the short-term focus, but don't lose sight
of the strategic focus."
Peter Morris, chief economist at
Flightglobal consultancy Ascend, says no network carrier will ever get
their costs down to match those of their low-cost counterparts. "There
are certain sticking points for the legacy carriers, things like pilot
conditions," he says, yet notes the market means these carriers have to
tackle such issues to compete. "You don't have an option to ignore the
market - it's what the market is willing to pay," he says.
"They
have to carry on focusing on cost reduction, yet have to be conscious
there will always be a gap, so it comes back to frequency, and service
enhancement," he adds.
The challenge, though, is that evolving
low-cost carriers continue to encroach on the traditional network
carrier territory - increasing frequency and enhancing their product
offering to appeal to business travellers. "[Network carriers have] got
to look at it objectively on what the value is of these services [they
offer]," he says. "What else have you got other than a bottle of
champagne? What are the weapons they have left to fight with?"
So a
decade on from the first European network carrier responses to the
arrival of low-cost outfits, the incumbents in many ways find themselves
back at square one and renewing their attack on short-haul. This is
crucial in order for their overall business to work. Carriers must find a
way to retain their feeder networks without wiping out their long-haul
profits in the process .
Europe's big three carrier groups are
taking steps to address short-haul. Lufthansa will decide by spring 2013
how to restructure its intra-European network and merge its in-house
narrowbody operations with low-cost subsidiary Germanwings; Air France
has made overhauling its short and medium-haul operations central to its
restructuring; and IAG launched Iberia Express to tackle short-haul
challenges in the Spanish airline's Madrid operations.
IAG is
following a similar model at Iberia Express as Iberia chose with Click
Air - the budget operation it launched to operate short-haul out of
Barcelona and which ultimately merged to form Vueling. With the axe
hanging over Bmibaby, Vueling is one of the two last European network
carrier budget affiliates left standing, along with Lufthansa's low-cost
unit Germanwings.
Vueling's chief executive, Alex Cruz, believes
one of the keys to its success was that Iberia has given the carrier
its independence. "The starting point was we are going to let the people
go and do it, and that was a big leap of faith," he says.
"If you
are a big airline, unless you are in a position of severe financial
stress and you have the support of the government, the task of
restructuring the short-haul operation is difficult," Cruz adds.
He
believes there is likely to be a move to lower-cost platforms two ways -
"the friendly or unfriendly way". Either will be through competition
from low-cost carriers, which will have a substitution effect - while
also growing the market - or through co-operation between the network
carrier and low-cost partner, such as being seen with
Eurowings/Lufthansa or the creation of Iberia Express.
"The 40-120 minutes flight segment will continue to be the industry's premier battleground," Cruz adds.
Our
787 fleet will be painted with the globe livery but will get its own
unique twist: the gold line along both sides of the fuselage will
feature a special swoop from nose to tail. Our design is inspired by
Boeing’s trademarked swoop, and pays tribute to our long history of
working together. 
