Air France

US carriers remain bullish on demand as capacity discipline ensues

Current robust demand trends are creating a sustained confidence among US carriers that the airline business now has a strong foundation to withstand fuel price fluctuations and begin delivering consistent positive results. Although the business overall is still not delivering adequate returns, management teams at US carriers are encouraged the building blocks are in place to manage the industry’s cyclicality. The transformation occurring through capacity discipline and shrewd revenue management is beginning to catch the attention of investors that historically avoided the troubled airline industry.

Recently US Airways president Scott Kirby told a group of investors that during the last three years US airline industry revenues have grown in the double-digit range, which he concluded was a remarkable result in the particularly cyclical airline business. The performance appears to be drawing attention from investors that have eschewed the industry based on past performance, as Mr Kirby remarked during the last few months he has encountered and met with potential investors never drawn to the airline business. He believes their interest is an endorsement in the rationalisation ushered in by consolidation and improved capacity management.

Spiralling fuel costs trigger higher 1Q2012 loss at Air France-KLM

Incessantly high fuel costs and an unwelcome increase in employee expenditure, highlighting the urging need to restructure workforce productivity and pay, pushed Air France-KLM Group into a deeper loss for 1Q2012 despite a surprising rise in passenger unit revenue and buoyant passenger traffic. Operating loss for the first three months widened almost 50% from EUR403 million to EUR597 million in the year-ago period. Air France-KLM’s net loss remained flat at EUR368 million but benefitted from a one-off gain of EUR98 million relating to the sale of a stake in Amadeus.

Air France-KLM is not Europe’s only airline group to report worsening 1Q2012 results. Lufthansa Group, Europe’s largest airline group, has posted a EUR381 million operating loss for the first three months of 2012, compared to a EUR169 million operating loss posted in 1Q2011 and announced it will cut 3500 full-time jobs in administrative departments worldwide over the coming years as part of its SCORE programme. SAS Group also has reported a 1Q2012 net loss of SEK729 million (EUR82 million), doubling its 1Q2011 net deficit of SEK373 million (EUR42 million).

IAG, Lufthansa and Air France-KLM confront short-haul cost options; Air France will be sorely tested

International Airlines Group (IAG) CEO Willie Walsh has indicated that he is fully prepared to meet any opposition head-on in restoring the Group’s short-haul cost disadvantage against Europe’s major LCCs like easyJet and Ryanair, a reference to Iberia’s pilots who have been striking on a weekly basis in protest against recently-established subsidiary Iberia Express operating off a lower cost (and pilot salary) base.

Rather more timidly, Lufthansa recently appeared to confirm it was exploring a “business case” to merge operations of the Group’s lower cost Germanwings subsidiary with the full brand Lufthansa fleet. Germany’s Bild Zeitung reported that a new low-cost subsidiary, project named Direct 4 You, was also being considered.

These reports follow Air France-KLM chairman and CEO Jean-Cyril Spinetta’s recent comments that the company was considering using Air France-KLM Group’s French version of its Dutch subsidiary Transavia as an umbrella for an apparently similar low-cost model to its two major European rivals.

Finnair’s new short-haul model has to be ‘ruthlessly’ low-cost, says CEO Vehviläinen

This is the year of Europe’s legacy carriers finally addressing their unsustainably unprofitable short-haul networks, and the answers so far have primarily been to strip costs out of existing models to make the carriers competitive against low-cost rivals. But Finnair’s decision to outsource its short-haul flying to a joint-venture partner suggests hybrid models can only achieve so much savings, while the structure of legacy carriers has inherent higher costs that cannot be taken out. Starting afresh becomes another, better, solution.

And a tabula rasa today in Europe, or at least Scandinavia, cannot be used to launch a hybrid carrier, Finnair CEO Mika Vehviläinen tells CAPA. Rather, when Finnair’s new short-haul operation commences in 1H2013, it must be “ruthlessly” low-cost, Mr Vehviläinen said. Yet this poses quandaries for Finnair’s business model of efficiently linking Europe with Asia as long-haul passengers, premium in particular, will be subject to LCC-style service on onward connections.

Conversely, lower-cost feeder flights could make Finnair’s long-haul services more price competitive.

airBaltic unveils restructure plan as it seeks to return to the black by 2014

With its latest business plan, airBaltic has joined a number of other European carriers seeking to turn around its operations. As with Air France, Austrian Airlines and Air Malta, airBaltic is attempting to return to profitability in the face of rising competition and fuel prices. The carrier’s restructuring plan is aimed at strengthening its operations with a modernised and simplified fleet, while reducing expenses and its workforce.

airBaltic’s plan, titled “ReShape”, was unveiled earlier this month but had been expected following developments in late 2011 - when the Latvian Government stepped in to acquire Baltic Aviation Services’ (BAS) 47.2% stake in the carrier. This brought the Government’s total ownership of airBaltic to 99.8%.

Air France-KLM reports deep operating loss for FY2011, needs “Transform 2015” plan to deliver

Air France-KLM has reported an operating loss of EUR353 million for 2011, a significant turnaround from its 2010 profit of EUR28 million - and follows Lufthansa's 18% year-on-year decline in operating profit to EUR820 million last year. This has been a difficult year for the Franco-Dutch airline group, as it battled rising fuel prices and uncertainty across many of its markets. The start of 2012 saw the Group launch ‘Transform 15’, its turnaround programme aimed at restoring profitability. The 2011 loss emphasises the need for this programme to deliver results, given a continuing uncertain outlook as Europe's economic troubles persist amid high fuel prices.

The Group’s revenue was unable to absorb rising fuel expenses; although total revenues increased by 4.5% year-on-year to EUR24.36 billion, operating costs rose 6.2% to EUR24.72 billion. Fuel expenses alone surged 16.3% year-on-year.