Denmark

European airline consolidation to enhance financials? Few deals to be done, at least locally

European airline margins have underperformed other regions for years. There are many reasons for this, but our analysis suggests that Europe’s relative lack of consolidation may be a significant one, since margins appear to be correlated with market concentration. Even after a number of significant deals over the past decade, the European market is less concentrated than North America, where consolidation has gone further, to the benefit of margins. Europe is also less concentrated than Asia-Pacific (analysed as its sub-regions), whose margins have consistently been the highest.

If consolidation brings structural benefits, are there still European deals that can make a difference? Europe has a long tail of small carriers, which are unlikely to have a significant impact, but comparison with North America points to the potential for further combinations among the top five. Nevertheless, there are hurdles to such deals, not least of which are the ongoing restructuring programmes at Europe’s Big Three and the incompatibility of LCC/FSC mergers, but some second tier groups could be targets.

European airline labour productivity: CAPA rankings

This analysis updates CAPA's previous study of European airlines’ labour productivity ("European airlines’ labour productivity. Oxymoron for some, Vueling and Ryanair excel on costs") to reflect the most recent financial results and adds four carriers not included in the original article (Wizz Air, Aegean Airlines and the two IAG subsidiaries British Airways and Iberia).

The contrasting performance of LCCs and legacy carriers is clear, although there are some notable exceptions to the pattern. BA and Iberia’s different labour cost productivity is significant, while Air France-KLM and SAS are weak performers.

We introduce an overall CAPA European airline labour productivity ranking, revealing the carrier with Europe’s most productive workforce, based on six measures.

Europe's non-scheduled airlines in long-term structural decline, but Thomas Cook, TUI evolving

The market for non-scheduled (charter) passengers in the UK and across Europe is in structural decline and this appears to be confirmed by recent data from the UK Civil Aviation Authority. The main beneficiaries have been the low-cost carriers as holiday-makers have developed the habit of assembling their own self-made package of flights, hotels, car hire and other services. Nevertheless, there is still a role for integrated tour operators, particularly for specialist, long-haul and other niche holidays. This is illustrated by TUI Travel’s recently reported expectation of a 10% increase in profit for FY2013.

However, neither TUI Travel nor Europe’s other major listed tour operator, Thomas Cook, has any plans to expand its fleet and Thomas Cook has even indicated that it is considering an asset light model, making more use of third party capacity. The Thomas Cook group continues to focus on its restructuring, an important element of which is its recent decision to integrate its four airlines into one. This could also be a precursor to selling its airline eventually as the travel companies focus on their distribution and destination management skills.

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

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%.

SAS SWOT: final call to establish a sustainable Scandinavian Airlines

SAS has been through many restructuring programmes and capital raisings over a number of years. Yet it still has high unit costs and poor labour productivity, is loss-making and has a weak balance sheet. In 1QFY2013 (Nov-2012 to Jan-2013), the group's loss before tax and non-recurring items widened to SEK801 million from a SEK656 million (EUR78.7 million) loss a year earlier. Nevertheless, it continues to target a positive pre-tax result and an EBIT margin of more than 3% for FY2013.

The Nordic region contains a more efficient long-haul operator (Finnair) and is experiencing increasing penetration by short-haul low-cost operators from elsewhere in Europe. Also, in Norwegian Air Shuttle, SAS has a low-cost local operator that competes with it on both short-haul and (from this summer) long-haul. In Nov-2012, CEO Rickard Gustafson called the ‘4Excellence Next Generation’ plan, which aims to achieve SEK3 billion (EUR360 million) of annual savings by 2015, a “final call if there is to be a SAS in the future”.

For trans-Atlantic airlines, JV benefits are less than obvious as they mature. A US perspective

SkyTeam partners Air France-KLM, Alitalia and Delta are approaching the fifth anniversary of the launch of their immunised trans-Atlantic joint venture. But the major strategic moves by those airlines during the last year were squarely outside that umbrella, as Air France warmed to the Gulf carriers through its new partnership with Etihad, and Delta moved to improve its position in the London Heathrow market through an equity stake and partnership with Virgin Atlantic.

Star joint venture partners Air Canada, Lufthansa and United have been preoccupied throughout most of the last year with getting their own respective houses in order and have done little publicly to play up any advantages they are enjoying through their business partnerships. oneworld joint venture partners American Airlines and sister carriers British Airways and Iberia have been equally distracted with Chapter 11 restructurings, mergers and strikes – and meanwhile, Qatar Airways has been welcomed into the fold, further complicating the evolution of the global alliances.