Jetrader - September/October 2011 - 18

State of the Regions

Europe’s

Fight for Survival
European carriers slower to rebound from crisis
By Polis D. Polycarpou, Vice President-Aviation Division, DVB Bank SE “The worst sort of business is one that grows rapidly, requires signiﬁcant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” -Warren Buffett With the fuel price crisis in 2008, followed by the economic and ﬁnancial crises in 2009, the air transport industry was hit by its very own “double whammy.” In monetary terms, according to the International Air Transport Association (IATA), the world’s airlines lost almost $26 billion over those two years, with 2009 also witnessing a 15 percent drop in revenues. With the industry on “code red,” a multitude of restructuring and streamlining plans were put into effect. With surprisingly few casualties, infectious consolidation and aided by the global economic recovery, 2010 enjoyed a miraculous rebound and return to prosperity for the aviation community. The phenomenal and unprecedented turnaround resulted in an almost $28 billion jump in proﬁts for the airlines, with IATA recently conﬁrming the ofﬁcial 2010 net result for the industry at $18 billion. Indeed, the supply-demand equilibrium was succeeded through excellent capacity management displayed by the airlines, together with regimentally implemented cost-cutting measures and significant yield improvements. Air freight, as well as passenger transportation, made a truly astonishing recovery in 2010, exceeding pre-crises peaks—especially true in the Asia Paciﬁc region. However, what was traditionally one of the strongest regions for the industry, not only had contributed greatly to the massive losses of the previous years, but was also noticeably lagging behind: Europe. Due to a slower pace in economic growth, the ongoing debt crisis and increased regulation, the European carriers subsequently underperformed when compared to their global counterparts. What was the highest loss-making region in 2009 had actually contributed less than 20 percent to the rebound recorded by the Asian carriers in 2010. According to the Association of European Airlines (AEA), which represents the majority of Europe’s network carriers, its members carried 335 million passengers—just 10 million more than in 2009. In terms of revenue passenger kilometers (RPKs), this represented a mere 2.5 percent increase over the previous year. It is only fair to stress, however, that the performance of the European airlines was thwarted by the effects of external forces: namely the Icelandic volcanic ash cloud, which prompted panicked closures of European airspace; in addition to the exceptional disruptions caused by the heavy snowfall during the late winter months. Strike action, especially within the Eurozone, simply added insult to injury. Hence, even with the apparent global recovery, European air transport ﬁgures grew at a very conservative rate above the previous year’s depressed level. Despite genuine stronger growth being recorded in the second half of the year, the European recovery remained particularly feeble.

Effects of the Oil Crisis
On entering 2011, a double-dip, although very slight, remained a possibility given the uncertainty and instability evident in many of the European Union states. The airlines, clouded once more by the doom of rising oil prices, were faced with balancing the demand-supply conundrum, challenged by new and returning capacity induced by the increased trafﬁc. Before the end of the ﬁrst quarter, political unrest in North Africa and the Middle East served as a catalyst in the driving up of oil prices. With crude oil breaking the $100 per barrel barrier in early March, jet fuel had reached highs of $120 per barrel—rising by more than one-third in less than three months. Moving into quarter two, kerosene spot prices had reached crippling levels of $140 per barrel. Hence, IATA made downwards revisions to its industry proﬁtability forecast for 2011, initially set at $16 billion last year. Full-year proﬁts forecast were ﬁrst scaled back to $9.1 billion before being pushed down even further to $8.6 in March. In June, IATA once again slashed their forecast for airline net post-tax proﬁts to $4 billion, now less than half that forecast three months earlier and a quarter of the initial expectation. In the second quarter, the world’s air transport markets suffered unfavourable demand upsets caused by the natural disasters in Japan and the spreading socio-political unrest in the MENA region. IATA subsequently raised their forecast for Brent oil prices

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Jetrader - September/October 2011

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