26-Mar-2013 3:55 PM

European airlines’ financial results in 2012; Net profit of biggest 13 down 72% for the year

Analysis

The biggest 13 European airline companies for whom 2012 accounts are available reported an aggregate fall in net profit of 72% in 2012 to just EUR69 million. At the level of operating profit, which provides a more accurate view of underlying performance, the aggregate result fell by a more creditable 17% to EUR 1,662 million (71% of this from the four LCCs in the sample) and the operating margin fell by 0.5ppts to 1.5%.

Total revenues grew by a healthy 8.0%, but total costs grew faster, by 8.5%.

Costs were inflated by an 18.9% increase in fuel costs, whose share of revenues increased to 28%, up from one quarter in 2011. Excluding fuel, all other costs grew by 4.8%, appreciably slower than revenues.

LCCs grew faster, had higher load factors and, while their collective operating margin fell slightly, from 9.8% to 9.5%, this was vastly superior to the legacies' collective 2012 margin of just 0.5%.

At the individual airline level, Ryanair was the most profitable (although its margin slipped slightly), while Vueling, Turkish Airlines and Norwegian grew the fastest. Lufthansa was the only one of the European Big Three to post a positive operating result and Aer Lingus was the only predominantly short/medium-haul non-LCC to be profitable.

Loss-making Alitalia, airberlin and SAS are trapped in the sub-1,500 km average sector danger zone, too close to the LCCs and with cost bases that are not competitive.

Group of 13 major European airlines* 2012 financial and operating statistics

EUR million	2011	2012	% change
Revenue	100,528	108,552	8.0%
Operating profit	2,002	1,662	-17.0%
Operating margin %	2.0	1.5	-0.5
Fuel cost	25,444	30,260	18.9%
Fuel as % of revenues	25.3	27.9	2.6
Ex fuel cost	69,596	72,916	4.8%
Total costs	98,526	106,889	8.5%
Net profit	243	69	-71.8%

Operating	2011	2012	*% change*
ASK bn	1,235	1,274	3.2%
RPK bn	978	1,026	4.9%
Pax m	521	546	4.7%
Load Factor %	79.2	80.6	1.3
Average sector km	1,877	1,881	0.2%
RASK EUR cent	8.14	8.52	4.7%
CASK EUR cent	7.98	8.39	5.2%
CASK ex fuel EUR cent	5.87	5.94	1.3%
Fuel CASK EUR cent	2.14	2.47	15.0%

Europe's biggest airlines added 3.2% more ASKs and saw load factor gains in 2012

The group of the 13 European biggest airline companies that have reported results for 2012 collectively added 3.2% more capacity (ASK) in 2012 and saw traffic (RPK) growth of 4.9% and passenger numbers up 4.7%. This resulted in a 1.3ppt gain in load factor to reach 80.6%. The collective figures for all European carriers, reported by IATA, were capacity up 2.9% and traffic up 5.1% - both very similar rates to those of the biggest carriers.

The latter group's load factor performance was better than that of Europe as a whole, which saw an increase of 0.7ppts to 79.6%.

Fuel costs, up 15%, hit CASK, but ex-fuel costs also rose

Relatively modest capacity growth of 3.2% helped to push total revenue per ASK up by 4.7%, but total cost per ASK grew faster at 5.2%. Fuel cost per ASK increased sharply, by 15%, but costs ex fuel per ASK were also up, by 1.3%.

The higher growth in CASK than in RASK explains the fall in margins. While this is mainly due to fuel cost increases, even a small increase in ex fuel unit costs makes a difference when margins are so slim.

A clear divide between LCCs and the rest

Dividing the group of 13 between legacy carriers and LCCs (not always a clear line, but which airline belongs to which category is commonly accepted), it is clear that there are significant differences between the two categories.

(i) The LCCs grew faster (both ASKs and revenues), had higher load factors, shorter sector lengths and much higher margins than the legacies; and

(ii) LCCs saw higher growth in unit revenues and in unit costs than the legacies, both coming from a much lower level.

For the LCCs, fuel is a higher percentage of revenues (one third in 2012) and they saw a 25% increase in fuel costs in 2012. In spite of their good control over ex fuel unit costs (down by 0.4%), their overall unit cost still grew by 7.9%, just ahead of unit revenue growth of 7.6%. Thus, the LCCs' collective operating margin fell slightly, from 9.8% to 9.5%, but this compares with the legacies collective 2012 margin of just 0.5%.

At the net profit level, the aggregate loss of almost EUR1 billion of the 13 legacy carriers was more than offset by the aggregate profit of just over EUR1 billion of the four LCCs.

Group of nine major European legacy carriers* 2012 financial and operating statistics

EUR million	2011	2012	% change
Revenue	89,805	96,205	7.1%
Operating profit	956	488	-48.9%
Operating margin %	1.1	0.5	-0.6
Fuel cost	22,145	26,130	18.0%
Fuel as % of revenues	24.7	27.2	2.5
Ex fuel cost	63,220	65,874	4.2%
Total costs	88,850	95,717	7.7%
Net profit	-579	-946	63.3%

Operating	2011	2012	*% change*
ASK bn	1,014	1,037	2.3%
RPK bn	796	829	4.1%
Pax m	363	375	3.3%
Load Factor %	78.5	79.9	1.4
Average sector km	2,191	2,209	0.8%
RASK EUR cent	8.86	9.28	4.7%
CASK EUR cent	8.76	9.23	5.3%
CASK ex fuel EUR cent	6.55	6.65	1.6%
Fuel CASK EUR cent	2.18	2.52	15.3%

Group of four major European LCCs* 2012 financial and operating statistics

EUR million	2011	2012	% change
Revenue	10,723	12,346	15.1%
Operating profit	1,047	1,174	12.2%
Operating margin %	9.8	9.5	-0.3
Fuel cost	3,299	4,130	25.2%
Fuel as % of revenues	30.8	33.4	2.7
Ex fuel cost	6,377	7,042	10.4%
Total costs	9,676	11,172	15.5%
Net profit	823	1,015	23.3%

Operating	2011	2012	*% change*
ASK bn	221	237	7.0%
RPK bn	182	198	8.3%
Pax m	158	171	8.0%
Load Factor %	82.5	83.5	0.9
Average sector km	1,155	1,158	0.3%
RASK EUR cent	4.85	5.22	7.6%
CASK EUR cent	4.38	4.72	7.9%
CASK ex fuel EUR cent	4.01	4.00	-0.4%
Fuel CASK EUR cent	2.08	2.34	12.9%

The charts below further highlight the contrasting fortunes of the legacy carriers and the LCCs. The latter still represent a minority share of the number of airlines, ASKs, passengers and revenues, but dominate in terms of profits generated.

Out of our group of 13 airlines, four are LCCs, accounting for 19% of ASKs, 31% of passengers, 11% of revenues, but 71% of operating profit and a collective net profit greater than the collective net loss of the nine legacy carriers.

Group of 13 major European airlines* by business model type 2012

Group of 13 major European airlines* financial measures by business model type 2012 (EUR million)

The Big Three are still the biggest by revenue, but Vueling, Norwegian and Turkish are growing fastest and Ryanair is most profitable

In what follows, we present a number of charts ranking the 13 airline groups by a various measures, financial and operating, both absolute and by rate of growth in the measures.

The big three legacy carriers dominate revenues, but revenue growth is being driven by LCCs (especially the smaller pair Vueling and Norwegian) and by Turkish Airlines.

Ryanair is the most profitable carrier in Europe, in terms of operating margin, followed by easyJet, Turkish Airlines and Aer Lingus, although Ryanair's operating margin fell slightly in 2012 (note we have looked at calendar 2012 for Ryanair, rather than its financial year, which ends in March).

European airlines revenue 2012 (EUR million) and change from 2011 (%)

Finnair and Turkish Airlines recorded the highest percentage point improvements in their margins in 2012, For Alitalia, SAS and IAG, 2012 saw both an operating loss and a decline in the operating margin.

Two other loss-makers at the operating level, Air France-KLM and airberlin, at least saw a narrowing of their margin of loss.

European airlines operating margin 2012 (% of revenue) and change from 2011 (percentage points)

Ryanair carried more passengers than Air France-KLM

As with revenues, the big three legacy flag carrier groups dominate ASKs thanks to their long-haul profiles, although Ryanair, Turkish Airlines and easyJet are also of significant size in capacity terms.

Of course, Turkish Airlines' ASK capacity is boosted by a relatively long average sector length, whereas for easyJet and, in particular, Ryanair, ASK muscle reflects the sheer weight of seat numbers in the market place.

A comparison of passenger numbers highlights this latter point further. Ryanair carried more passengers in 2012 than Air France-KLM and was second only to the Lufthansa Group, while easyJet carried more than IAG.

Alitalia and airberlin cut capacity as Vueling, Turkish and Norwegian grow

As with revenues, Vueling, Turkish Airlines and Norwegian dominated growth in both ASKs and passenger numbers in 2012.

By contrast, Alitalia and airberlin contracted. Winter capacity cuts by Ryanair meant that, unusually for the carrier, its ASK growth in 2012 (4.2%) was lower than for the group of 13 in aggregate (4.7%).

European airlines capacity 2012 (ASK billion) and year-on-year change from 2011 (%)

European airlines passenger numbers 2012 (million) and year-on-year change from 2011 (%)

Load factor is a poor indicator of profit

The generally superior passenger load factors of the LCCs contribute to strong passenger numbers, although it is interesting to note that Air France-KLM ranks second in 2012 load factor (easyJet is number one, with a staggering 90.4%, calculated as RPK/ASK rather than pax/seats as usually reported by easyJet).

The large majority of carriers in our sample saw load factor gains in 2012, with declines only at Ryanair (very slightly) and airberlin. The latter saw a heavy 3.2ppts load factor fall (calculated as RPK/ASK), in spite of a 2.8% cut in ASK. Load factor is an unreliable indicator of profitability: the top four places by load factor include the two highest margin carriers (Ryanair and easyJet) and two of the three lowest margin carriers (Air France-KLM and airberlin).

European airlines passenger load factor 2012 (RPK as % of ASK) and change from 2011 (percentage points)

The 1,500km average sector length - the great divide

In addition to the LCC/legacy divide, the 13 airline groups that make up Europe's largest players can be split according to average sector length, with an interesting dividing point somewhere around 1,500km. Above this point are the big three legacy flag carrier groups, for whom long-haul is key to profitability and whose significant long-haul networks are difficult to replicate and are therefore still something of a defendable niche.

Also above the 1,500km mark are Finnair and Turkish Airlines, both pursuing long-haul growth strategies that, while different from one another, are based on their geographical positioning.

For airline groups that are at or below 1,500km average sector length, there seems to be a simple message: get out of this zone or become a low-cost carrier. With the notable exception of Aer Lingus, airlines in this segment are either loss-making sub-scale legacy flag carriers or profitable LCCs.

Aer Lingus has benefited from a significant cost cutting programme that helped to transform it from its days as a typical legacy flag carrier (and its average sector length is just over 1,500km).

The challenge for SAS, airberlin, and Alitalia, languishing in losses at the shorter end of the sector length spectrum is significant. They must either develop (rapidly) their long-haul networks, or take on the LCCs at their own game by dramatically lowering costs.

To some extent, all three are attempting both (they all increased average sector length in 2012 and are pursuing cost reduction programmes) and are developing partnerships and alliances to help them, but the outlook remains hazy at best.

European airlines average sector length 2012 (km) and change from 2011 (%)

Only SAS saw a fall in RASK

All but one of the 13 airlines saw an increase in total revenues per ASK in 2012. Only SAS stood as the exception. This measure is not directly comparable between the groups as the larger groups such as Lufthansa generate a significant level of revenues from ground-based activities such as maintenance and catering, in addition to cargo, while LCCs such as Ryanair generate all revenues from passenger air traffic.

The same is true of costs. Nevertheless, year-on-year changes in total revenue per ASK and cost per ASK help to explain changes in profit margins.

European airlines year-on-year change in total revenue per ASK 2012 (%)

Finnair improved margin through CASK containment, but Alitalia and IAG saw high CASK growth

Finnair's 2012 margin improvement was largely due to a good performance in containing costs per ASK and this was due to a 5% reduction in ex fuel cost per ASK offsetting an increase in fuel cost per ASK. Among the loss-making carriers, airberlin and SAS managed to lower ex fuel cost per ASK, as did the more profitable Turkish and Vueling.

Worryingly for loss-making Alitalia, total cost per ASK increased by more than 9% in 2012. The same is true for IAG, for whom cost per ASK increased by 11%, more than all the others.

European airlines year-on-year change in total cost per ASK and ex fuel cost per ASK 2012 (%)