European airline bosses focus on capacity discipline, LCC threat

Rotation

If European airline analysts were concerned about the potential financial impact of redirecting flights to avoid flying over conflict zones, they did not show it during the first-half earnings conference calls for the continent’s big three carriers.

Unlike corresponding earnings calls in the USA, which were dominated by queries over how airlines approach operations in volatile regions, the issue of how airlines decide which countries they can safely fly over was not raised at all during the results presentations of Air France-KLM, Lufthansa or IAG (the parent company of British Airways and Iberia.)

While this remains a hot topic, just two weeks after Malaysia Airlines Flight 17 was shot down over eastern Ukraine, it is being dealt with in varying ways outside the analyst calls. For instance, following the US FAA’s recent instruction to US carriers to avoid flying below 30,000ft over Iraq, Lufthansa said it would be avoiding Iraqi airspace for two days over the weekend. This is despite the carrier’s own belief that “there is currently no danger in flying over Iraq, or for Lufthansa and Austrian Airlines flights to the north Iraq city of Erbil”.

In a statement, Lufthansa says: “The background of the decision made by some aviation authorities is not clear yet and needs a comprehensive evaluation. With this step the company carries the growing uncertainty of customers and crew members that results from the different evaluations of aviation officials.”

Air France-KLM had already started avoiding Iraqi airspace earlier in the week, as had a number of other carriers including Emirates and Virgin Atlantic. However, airlines including British Airways have not suspended Iraq overflights, but had begun avoiding eastern Ukrainian airspace back in early March.

IAG chief executive Willie Walsh told the BBC that “our assessment is that it continues to be safe to overfly Iraq and, in common with many airlines, we continue to use airspace over Iraq”. The airline group “reviews this on a daily basis”, says Walsh, and he does not believe such decisions should be made by a central body: “I believe it would be unsafe if these decisions were taken out of the hands of individual airlines. It’s very important that airlines continue to assess the risks to their specific operations.”

The fact that these issues were not raised during the second-half earnings calls left airline bosses free to focus on discussing capacity discipline and how they are responding to the threats from low-cost carriers to their short-haul, intra-European markets. It also gave IAG’s Walsh room to gloat about his confidence in his airlines’ ability to compete more effectively than others on North Atlantic routes.

“The loser in the battle is United,” said Walsh, adding that the US carrier was “struggling to get its message across and deliver on the merger”, meaning British Airways and joint venture partner American Airlines are “leaving United in our wake, to be honest”.

IAG posted a second quarter operating profit of €380 million, an improvement of €135 million over the same period last year. Its operating profit for the first half of the year was €230 million, compared to an operating loss of €33 million a year earlier. Walsh says he is seeing growth in the premium market, particularly on the North Atlantic, which has led British Airways to start “looking at reconfiguring some of our aircraft to add additional premium capacity”.

Whereas the Boeing 747s operated by British Airways today contain 70 business class seats, the carrier could boost this number by taking premium seats from outgoing 747s and installing them on in-use aircraft. “As you retire the older 747s obviously you’ve got the seats coming off the older 747s and you can pick certain routes that will demand more premium traffic and add more premium seats effectively at little or no cost,” says British Airways chief executive Keith Williams.

Over at Lufthansa, second-quarter group operating profits dropped 17% year-over-year to €359 million. Second-half operating profit for the group grew by €41 million to reach €114 million, but the passenger division reported an operating loss of €96 million.

Lufthansa is in the process of restructuring its short-haul operations and will use its Eurowings and Germanwings subsidiaries to serve these routes, in response to threats from low-cost carriers such as EasyJet and Ryanair. Lufthansa chief financial officer Simone Menne told analysts that “it is only in this way that we can compete in the European short-haul market”.

Similarly at Air France-KLM, short-haul operations are being gradually transferred to the company’s Transavia unit. The Franco-Dutch airline saw its second-quarter operating profit increase by €154 million to €238 million. Its first-half operating result improved by €241 million, but was still in the red to the tune of €207 million. Air France-KLM chief executive Alexandre de Juniac says the airline has been “facing a weak environment with adverse headwinds”.

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