The financial performance of the European airline industry has been below the global average for several years and 2014 will not be any different. The eurozone economy seems to have stopped shrinking, but Europe is far from resolving its debt problems, and the weak demand environment will weigh on European carriers.
The European Commission is predicting GDP of the economy across the 17 countries using the euro will grow by only a modest 1.1% in 2014, and 1.7% in 2015. The unemployment rate will remain high—at around 12.2% in 2014. Although the figure will vary country by country, it is at its highest level since the currency was launched in 1999.
European airlines are projected to post a 1.9% operating margin and a combined $3.1 billion net profit in 2014, according to the forecast of the(IATA) released in September. Only one region, Africa, is projected to record weaker results. On the bright side, a 1.9% operating margin is an improvement on a 1.3% EBIT margin that Europe's airlines are expected to report in 2013, and the 0.7% margin realized in 2012, when European airlines on average earned a mere €1 per passenger.
However, the European airline industry is not a homogenous group and performance differs strongly by segment. Low-cost carriers (LCCs) have been reporting healthy profit margins, while Europe's legacy carriers and regional airlines continue to struggle. This diverging performance will continue in 2014 and reflects the evolving structural change of the European market. “There will be pockets of strength, such as the north and south Atlantic premium markets,” says Jonathan Sullivan, managing director for Europe and Middle East at Seabury Consulting. But “overall, at the end of 2014, conference attendees will express disappointment with European financial results, while having admiration for a select few carriers in Europe such as, , and Vueling.”
Virtually all of the continent's large network airlines and the smaller flag carriers are in some form of restructuring, and “those European carriers that have bet their restructuring plans on a robust economy and air travel demand in 2014 and 2015 will continue to fall short of plans,” Sullivan warns. “Those few carriers that have already pushed for dramatic structural re-sizes and figured out how to “shrink to profitability” within the bounds of an out-of-court restructuring will see a disproportionate upside in 2014.”
Association of European Airlines (AEA) CEO Athar Husain Khan acknowledges that Europe's network carriers will continue to face many challenges; yet he is upbeat and expects AEA members to turn the corner in 2014. Financial results already improved in 2013 over 2012, when member airlines jointly posted an operating loss of €1.3 billion. He says: “We anticipate that 2013 results will be on the good side of breakeven in spite of the high fuel prices, the slow recovery of the European economy and the regulatory burdens.” AEA operators carried 313.9 million passengers in the first ten months of 2013, up 1.7% on the year-ago period, and registered higher passenger growth of 2.4% during 2012.
A recent poll among members of the AEA showed that 40% of respondents perceive European Union regulations— such as the Emissions Trading Scheme —as the biggest threat to their business, while 17% see LCCs as the biggest threat and 31% point to the three big Middle Eastern carriers, Emirates,and .
The European Regions Airline Association (ERA) is slightly more positive in its outlook. “We do see signs on the horizon of the economic situation improving in Europe. On the basis of this, we expect to see an increase in demand and growth, albeit a small growth in 2014,” says ERA Director General Simon McNamara. He asserts that “changes in the airline business are still going to happen, with more consolidation and more airlines facing difficult times.” The past year was “incredibly tough” for Europe's regional airlines, McNamara notes, and “we probably will end 2013 with a 6% decline in passenger numbers.” ERA member airlines operate about 15% of scheduled flights in Europe.
Europe's leisure carriers have increasingly moved to a hybrid business model in past years, “and this is likely to continue in 2014,” says Sylviane Lust, Director General of the International Air Carrier Association (IACA). Competition between low-cost carriers and leisure carriers/tour operators is likely to remain fierce, but IACA members keep further improving the quality and comfort of the products they offer in order to address this, she says. “As always, our members will enforce strict cost controls. High seat load factors and high aircraft utilization will remain at the core of their business in the year ahead,” Lust adds.
Low-cost carriers will push to gain more market share on intra-European traffic in 2014 while also extending their footprint outside the EU. Ryanair intends to make use of the European Union's open skies agreement with Israel, which comes into force in April, and it has also obtained traffic rights to Russia., which is the first European LCC to venture into the low-cost long-haul market, will expand its long-haul as it takes delivery of a further four -8s in 2014. It launched flights from its Scandinavian bases to the U.S. and Bangkok in May, and Norwegian will begin three transatlantic routes from in July 2014. CEO Bjorn Kjos indicates that “Barcelona can be envisaged as a hub for future long-haul routes.” The Oslo-based LCC took delivery of its third 787 on Nov. 27.
LCCs now offer almost 40% of seat capacity on intra-EU routes; that is double the level of ten years ago. Three of Europe's ten largest airlines by departing seat capacity are budget operators (Ryanair, EasyJet and Norwegian), and Ryanair is Europe's largest airline in seat production, according to Innovata data. Ryanair put 6.2 million departing seats, or 10% of European seat capacity, into the market in November.
The last half of 2013 has seen increased convergence between Europe's short-haul carriers. Ryanair, EasyJet, Norwegian and Vueling are expanding their offerings to suit the short-haul business traveler, whileGroup and - are defining their non-hub products to more closely match their lower-cost competitors, with an unbundling of some of their services. The hybridization trend will likely continue in 2014, reckons Sullivan. “The LCCs will expand their distribution capabilities further and continue to find attractive short-haul opportunities.”
Ryanair has started to channel its expansion to primary airports and is establishing bases at Rome Fiumicino and Brussels Zaventem Airport. It also applied for slots at Copenhagen Airport, and Chief Executive Michael O'Leary says that “it is inevitable that Ryanair in the next five years will operate at all main airports in Europe—except for the mega-hubs such as, Frankfurt and Paris Charles de Gaulle and Orly.” Europe's largest LCC, which in September announced it would become more customer-friendly, will introduce a flexible business-like fare in the first quarter of 2014, and enter into agreements with GDS companies and online travel agents, including Google, as part of its strategy to target the business passenger and corporate buyers. Currently, the Ryanair website and calling center are the exclusive distribution channels for the LCC's services.
Europe's majors are not only losing ground to LCCs on short-haul routes, their market share and profitability on long-haul routes is also declining. AEA members grew long-haul seat capacity 22% between 2007 and 2013, according to Innovata data, whereas non-AEA members increased their long-haul seating capacity in the period by 35%.
The Persian Gulf carriers have been adding routes and frequencies at a rapid pace in recent years, and Emirates now operates to almost 30 destinations in 16 member states in the EU, plus two gateways in Switzerland. It deploys on average 16 daily flights to the U.K., including several with the. Europe-Australasia traffic routed via the Middle East is growing at roughly 20% per annum, an Amadeus Air Traffic Intelligence report reveals.
“Because Qatar, Etihad and Emirates will be growing capacity greater than their local demand increases, we can expect that the major flows that they serve —Europe/Middle East to [the] Indian subcontinent/South east Asia/Australia—will remain under significant pricing pressure in 2014,” Sullivan observes.
will be the big European story of the year, and its potential bankruptcy could represent a much-needed step in Europe's consolidation. Europe is still a very fragmented market. It has some 450 airlines, compared with 190 in North America, according to data from the Air Transport Action Group (ATAG). The five biggest airlines in Europe have a 45% market share, whereas North America's top five (prior to the merger of and ) accounted for nearly 70% of that market.
But Europe's nations do not easily abandon their flag carriers, and the Italian government will step in to save Alitalia once again. It has earmarked the state-owned postal service, Poste Italiane, to contribute €75 million ($103 million) in fresh funds. The exercise will have to be cleared by the EU competition authorities, and their response to Alitalia could impact ongoing reviews of similar cases—including Air Baltic, Estonian Air, Cyprus Air and LOT—in which governments provided public money to keep their flag airlines afloat.
Those airlines might have timing on their side. With elections for the European Parliament scheduled for May, and a new College of EU Commissioners due to start in the fall, European policy-makers might be more lenient in their assessment of Alitalia—and other struggling carriers—to secure votes and safeguard jobs.