12-Oct-2009 3:45 PM

European airlines suffer: AEA, Lufthansa, Air France-KLM and British Airways traffic review

Analysis

Europe's three major network carriers, Lufthansa, Air France-KLM and British Airways continued to struggle in Sep-2009. Air France-KLM and British Airways conceded that yield remained under the pressure in the month, while Lufthansa noted that demand was "persistently weak".

The Association of European Airlines (AEA) reports that members endured their tenth consecutive month of traffic reduction in Aug-2009, with the AEA expecting September results to be even worse.

Lufthansa recorded traffic growth above the AEA average in Aug-2009, while Air France-KLM and British Airways fared worse.

Lufthansa, Air France, KLM, British Airways and AEA passenger growth (% change year-on-year): Jan-2008 to Aug-2009^

Revenue picture "even more gloomy" than traffic contractions: AEA

AEA Director General, Ulrich Schulte-Strathaus added that the revenue picture is "even more gloomy", with the average price per km during the peak mid-Summer period down more than 17% year-on-year". He added that AEA airlines' total passenger revenues are "between EUR1.5 billion and EUR2 billion lower per month than the levels planned and budgeted for". Mr Schulte-Strathaus stated the carriers' cash reserves have been "depleted through a profitless Summer, and we are facing a very bleak Winter period".

Lufthansa faces "persistently weak demand" in Sep-2009

Lufthansa Group stated Sep-2009 traffic results were "defined by persistently weak demand" in Sep-2009.

During the month, Lufthansa Group's traffic data was affected by the consolidation of both British Midland (bmi) and, for the first time, of Austrian Airlines (AUA), meaning Group capacity rose by 14.5% in the month, matched by a similar increase in traffic (RPKs) (+14.6%).

Lufthansa Group traffic highlights for Sep-2009

Currency: EUR		% Change
Traffic pax (000)	7,936	+24.9%
Traffic RPKs (mill)	15,765	+14.6%
Capacity ASKs (mill)	19,646	+14.5%
Load factor (%)	80.2%	-

The consolidation effects were particularly evident in the Europe traffic region, where capacity (+34.5%) and traffic (+36.8%) both picked up sharply, and load factors improved to 73.6% (+1.3 ppts).

Lufthansa Group, British Airways and Air France-KLM capacity (ASKs) growth (%): Jan-2008 to Sep-2009

Without the effects of consolidation, Lufthansa traffic was down by 3.1%. As capacity management reduced capacity by 4.0%, however, the load factor was up 0.7 ppts to 80.9%.

Lufthansa Passenger Airlines traffic highlights for Sep-2009

Currency: EUR		% Change
Traffic pax (000)	5,069	(2.0)
Traffic RPKs (mill)	10,989	(2.8)
Capacity ASKs (mill)	13,687	(3.6)
Load factor (%)	80.3%	+0.7 ppts

SWISS International Airlines traffic highlights for Sep-2009

Currency: EUR		% Change
Traffic pax (000)	1,206	+2.3%
Traffic RPKs (mill)	2,333	(2.8)
Capacity ASKs (mill)	2,783	(5.9)
Load factor (%)	83.8	+1.0 ppts

Austrian Airlines traffic highlights for Sep-2009

Currency: EUR		% Change
Traffic pax (000)	970	n/a
Traffic RPKs (mill)	1,614	n/a
Capacity ASKs (mill)	2,073	n/a
Load factor (%)	77.9%	n/a

BMI traffic highlights for Sep-2009

Currency: EUR		% Change
Traffic pax (000)	691	n/a
Traffic RPKs (mill)	1,614	n/a
Capacity ASKs (mill)	2,073	n/a
Load factor (%)	77.9%	n/a

"No sign of a fundamental improvement" in cargo market: Lufthansa

The cargo market is also suffering. According to Lufthansa, "there is still no sign of a fundamental improvement in market conditions". Revenue Cargo tonne-kilometers fell by 8.3% in Sep-2009. However, as the carrier significantly scaled back capacity the month (-12.2%), the cargo load factor picked up to 66.4% (+2.8 ppts).

Lufthansa remains sufficiently financed moving forward

In reaction to the current conditions, Lufthansa reportedly plans to cut administrative costs by 15% by the end of 2011. However, the carrier has stressed that, despite recent acquisition activity, it remains sufficiently financed and "does not need to approach the capital markets in the short term for reasons of liquidity".

Air France-KLM unit revenues "remain under pressure"

Meanwhile, Air France-KLM noted that market conditions are "similar to those prevailing before the Summer and unit revenues remain under pressure".

As in the previous two months, Air France-KLM experienced a reduction in traffic (-3.7%) in Sep-2009, below the reduction in capacity (-4.9%), leading to a 1 ppt improvement in the load factor to 81.9%. The group carried 6.2 million passengers (-5.3%).

Air France-KLM traffic highlights for Sep-2009

Currency: EUR		% Change
Traffic pax (000)	6,237	(5.3%)
Traffic RPKs (mill)	17,353	(3.7%)
Capacity ASKs (mill)	21,193	(4.9%)
Load factor (%)	81.9%	+1.0 ppts

Air France-KLM's passenger contractions have been more pronounced than those experienced by British Airways and Lufthansa since Mar-2009 (when Air France-KLM's 10% contraction was exceeded by British Airways' 12% reduction).

Lufthansa Group, British Airways and Air France-KLM passenger growth (%): Jan-2008 to Sep-2009

On the European network, both capacity and traffic were down by 5.6% year-on-year, for a stable load factor at 72.5%.

Air France-KLM's cargo business (including Martinair) saw its load factor improve by 2.2 ppts to 66.1% on the back of declines in capacity and traffic of 20.0% and 17.2%, respectively.

Air France capacity reductions for Winter; Air France-KLM and Lufthansa seeking increase in freight rates

Reacting to the current challenging conditions, Air France-KLM has announced plans to reduce capacity by 1.6% in the upcoming Winter schedule, with a 2.8% reduction on long-haul services and 6.4% reduction in short and medium-haul capacity, compared to Winter 2007 levels.

In the freight segment, Air France-KLM (including Martinair) reportedly plans to reduce freight capacity by 20% in the upcoming months to match the slump in demand. The carrier also reportedly plans to operate approximately 40% less full freighter capacity through the Winter.

Air France-KLM has also stated it is seeking a 20-30% increase in freight rates in the upcoming Winter season, matching similar planned increases by Lufthansa Cargo, in an attempt to increase revenues and profitability from freight operations.

Air France-KLM hopes to breakeven in FY2010

Air France-KLM added that capacity would remain at current levels in 2010 and 2011, with traffic not expected to return to 2008 levels before 2012.

Air France-KLM also stated it hopes to reach breakeven point at the start of FY2010 (commencing Apr-2010), excluding the impact of fuel hedging contracts, although the carrier added that it can not predict when the company will return to profitability, adding that fuel hedging could continue to have a negative impact on the carrier in FY2010.

Air France-KLM seeking ancillary revenue boost with new 'Premium Economy' product

In other developments, Air France-KLM recently stated it plans to offer additional service traditionally provided for premium passengers on an "a la carte" basis to Economy travelers, to boost ancillary revenues amid a decline in ticket revenues. The carrier added that it has not ruled out the possibility of removing Business class from some medium-haul routes.

The Premium Economy (Voyageur) offering will initially be available on services to New York, followed by Tokyo, Singapore, Beirut, Beijing and Hong Kong from 25-Oct-2009, with the product to be extended to the entire long-haul network by the end of 2010.

The carrier added that while the product was originally designed as an upgrade option for Economy passengers, it is now being deployed to attract Business travelers who would have otherwise downgraded to Economy. The carrier has invested EUR75 million installing the seating and expects to generate EUR120 million in extra revenue p/a from the move.

British Airways yields remain "under pressure"

Echoing the comments made by Air France-KLM, British Airways stated that market conditions in Sep-2009 "remained unchanged, with yields under pressure from the year-on-year impact of lower fuel surcharges, exchange movements and mix".

British Airways traffic highlights for Sep-2009

Currency: EUR		% Change
Traffic pax (000)	2,923	(1.7%)
Traffic RPKs (mill)	9,826	(0.8%)
Capacity ASKs (mill)	12,087	(3.7%)
Load factor (%)	81.3	+2.4 ppts

The carrier handled 2.9 million passengers in Sep-2009, a 1.7% year-on-year reduction, on a 3.7% capacity (ASKs) reduction. Traffic (RPKs) was down at a lower rate (-0.8%), resulting in a passenger load factor increase of 2.4 ppts to 77.7%, for the highest load factor level among the three majors (as has been the case since Apr-2009).

Lufthansa Group, British Airways and Air France-KLM load factor growth (%): Jan-2008 to Sep-2009

British Airways' traffic comprised a 7.9% reduction in premium traffic and a 0.7% increase in non-premium traffic. The carrier added that premium traffic comparisons are starting to be against a weaker base, with the bankruptcy of Lehman Brothers occurring mid-way through Sep-2008.

British Airways premium and non-premium traffic contractions (year-on-year): May-2007 to Sep-2009

On the European network, capacity was down by 5.2% and traffic was 2.0% lower than 2008 levels, resulting in a 2.6 ppt load factor increase to 77.7%.

For more Sep-2009 traffic analysis, see separate reports: