Three years of belt-tightening to ride out a global economic downturn should have put European airlines in a strong position to ride a recovery wave.

There is just one problem—there is no wave. Rather, carriers face a fresh storm of problems in the guise of sustained economic weakness in Europe; crisis situations in North Africa, the Middle East and Japan; and fuel back on an uphill trajectory. Airline managers once again are scrambling to see what further cost-cutting measures they can come up with.

Lufthansa and Aer Lingus management each say that new ways to generate additional savings are being considered. Finnair has rolled out some steps and is talking about potentially shedding some group activities.

So far, some carriers believe they can remain profitable through year-end, though the margins for doing so are narrowing. The one saving grace is that a strong euro is at least partly shielding airlines from the fuel hikes, although not enough for many to ward off double-digit increases in first-quarter fuel bills.

Just how difficult the environment is was underscored by Lufthansa, one of the continent's strongest carriers both financially and operationally. In spite of the much improved global economy, the passenger airline group as a whole (comprising Lufthansa, Austrian Airlines, Swiss International Airlines, BMI and Germanwings) saw its operating loss widen by 4.8% to €391 million ($571.6 million). Lufthansa and Austrian slightly narrowed their losses, while Swiss posted a small operating profit. Germanwings, particularly its subsidiary BMI, did not fare as well, plunging into much deeper losses.

For BMI, the situation is particularly dramatic because of its exposure to the relatively weak U.K. economy and its strong reliance on the Middle East, which makes up 33.3% of its traffic. BMI's losses grew by 40% to €63 million as revenues fell by 9.2% to €178 million. The airline launched a new service from London to Tripoli on the eve of Libya's civil war and operated only a single flight before pulling out. BMI also wanted to introduce roundtrips between London and Marrakesh, Morocco, but reversed course following recent bombings in the city that were attributed to Al Qaeda.

The earthquake, tsunami and nuclear crisis in Japan also had a deep impact on the group, according to Chief Financial Officer Stephan Gemkow. Since early March, Lufthansa's traffic to Japan dropped by 53.6% on 25.4% less capacity. To make matters worse, the airline incurred significant extra costs through interim stops in Seoul, South Korea, that had been introduced to avoid crew overnight stays in Tokyo.

In spite of a sophisticated hedging program, the group had to spend almost €300 million more in fuel in the first quarter than they had anticipated.

Another key issue for the airline is its European network. Gemkow says that essentially all of the group's carriers are incurring losses on short-haul routes—including otherwise highly profitable Swiss. Top executives, skeptical that the unit-cost reduction plans go far enough to reach the turnaround point, have convened the executive board to discuss further measures. However, the members recognize that not every plan can be implemented overnight.

Gemkow is nonetheless relatively optimistic about the remainder of this year. He believes revenues will continue to climb on the back of a growing economy and he expects an operating profit in excess of the €876 million reached in 2010.

For Europe's mid-sized carriers, the situation is not much different. Finnair plans to reconfigure its Airbus A319 and A320 cabins to gain greater operating efficiencies as a short-term fix, but is also scrubbing its business model more broadly, CEO Mika Vehvilainen signals.

Finnair is reviewing core activities and, so far, outsourcing some business is one possibility. Another area under review “is our catering unit, where we plan to evaluate alternatives,” Vehvilainen says. Also, a new head of purchasing is being sought to generate efficiencies in that field.

The single-aisle cabin change is merely a band-aid, although Vehvilainen says it “will reduce unit costs and bring increased capacity while maintaining passenger comfort.” Furthermore, he adds, “the company will strive to further improve the utilization efficiency of its narrowbody fleet through cross-utilization of resources in scheduled and leisure traffic.” Finnair also is targeting enhanced automation to generate efficiencies and to eliminate overlapping activities. “In feeder traffic, our goal is to improve profitability through, among other things, partnerships,” the CEO says. “For example, in arrangements with Finncomm Airlines we are seeking a solution in which Finnair, in cooperation with partners, would create a cost-efficient production platform for certain feeder traffic routes.”

Vehvilainen also cites overcapacity on some routes as a problem, as does Aer Lingus CEO Christoph Mueller, who notes “We have to watch that very carefully.”

Like Finnair, Aer Lingus is considering augmenting some steps already taken to navigate the difficult operating conditions. In announcing first-quarter results, Mueller says: “In light of the continued weakness of the Irish economy and pressures on non-controllable costs, we are assessing whether the Greenfield cost-reduction program is sufficient to protect profitability for the future or whether further measures are required.”

Aer Lingus was hit not just by weakness on some leisure routes—linked to its home market's poor general economic situation—it also suffered labor disruptions in the first quarter. Although a portion of that weakness was offset by performance on some business routes, and yield per passenger was up 9% over the same period in 2010, overall the first-quarter operating loss worsened by 41.7% to €53.7 million before exceptional items. The airline still anticipates a profit this year, but well below that of 2010 levels, management warns.

The problems the carriers outlined are likely to be echoed by other European airlines as first-quarter financial performance reports roll in. In many respects it merely reflects a more extreme view of what is happening industry-wide. International air traffic fell by 0.3% in March compared with February as a result of the troubles that rocked Japan and the Middle East, according to figures released by the International Air Transport Association. “The profile of the recovery in air transport sharply decelerated in March,” Director General and CEO Giovanni Bisignani says. “The global industry lost 2 percentage points of demand as a result of the earthquake and tsunami in Japan and the political unrest in the Middle East and North Africa.”

Low-fare carriers are not immune. Spanish airline Vueling is experiencing short-term pressures to adjust. The airline was looking to keep capacity flat in the first quarter, but with fuel costs increasing 20%, it reduced capacity around 6% to focus on profitable routes. Still, the carrier suffered a €23 million loss, far steeper than the same period the year before.

The airline also is faced with heavy competition; 75% of its routes overlap with three or more rivals compared with a 60% overlap in the first quarter of last year. “Increasing competitive pressure and the weak state of demand has led to a sharp fall in fares by all market agents,” the airline states in reporting its first-quarter results.

Still, the carrier has not jettisoned its plans to build business out of new bases in Amsterdam and Toulouse.

Norwegian Air Shuttle, too, endured a steep loss in the first quarter as it was impacted by a double whammy—higher fuel costs at the same time it was investing significantly in new market segments. The airline posted a net loss of 293 million Norwegian kroner ($53.8 million), up from 199 million kroner a year earlier. CEO Bjorn Kjos says the airline spent 140 million kroner more on fuel and had extraordinary start-up costs of another 100 million kroner in the quarter.

Though Kjos acknowledges the challenges, he says that “on the positive side, we see good passenger and production growth as well as good pre-sale of tickets.” He also mentions significant investments in new business routes in Sweden and a large investment in Finland. “This has resulted in extraordinary costs in the order of 100 million kroner in the first quarter. With the same fuel and currency conditions as last year, adjusted for start-up costs of 100 million kroner, we have an improvement of nearly 50 million kroner compared to last year.”

Revenues increased from 1.6 billion kroner to 1.9 billion and passenger numbers were up to 3.1 million from 2.7 million. The load factor declined by one point to 74%.

Norwegian's fleet contains 57 Boeing 737s. The airline took delivery of seven 737-800s in the first quarter and phased out seven 737-300s. It will phase in another eight -800s during the year. Kjos says that plans to boost capacity by 25% this year are still on track.

European airlines remain wary of other pitfalls that could slow financial recovery even if economic growth in Europe takes off. Next year carriers operating in the European Union will have to bear the costs of complying with an emissions trading scheme. Airline officials warn it will be difficult to pass those costs on to consumers, particularly in a weak-demand environment, which will add further pressure to the collective bottom lines.