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European airline industry steadies itself for the peak summer quarter

Analysis

As 3Q2022 gets under way, Europe is lagging the leading regions in the capacity recovery, but is nevertheless within touching distance of them. Its airlines are also closing in on a return to positive EBIT margins for 2022, according to IATA's latest forecasts.

Europe's seat capacity is at 87.0% in the week commencing 4-Jul-2022, which is a shortfall of -13.0% against the equivalent week in 2019. This stretches its plateauing to a seventh week in a narrow range, although this is a modest improvement of 0.6ppts from last week (week of 27-Jun-2022).

Europe remains fifth in the regional ranking, above only Asia Pacific, where capacity is down by -22.1%. In the Middle East capacity is down by -12.6%, while Africa capacity is down by -6.4%, Latin America by -5.7%, and North America is down by -4.6%.

The trajectory of European aviation's recovery in 3Q2022, the peak summer quarter and historically key to annual profitability, will be watched closely.

Summary

Europe has 32.0 million seats vs 36.8 million this week in 2019 – down -13%

In the week commencing 4-Jul-2022, total European seat capacity is scheduled to be 32.0 million, according to OAG schedules and CAPA seat configurations.

This is -13.0% below the 36.8 million seats of the equivalent week of 2019, which is an improvement of 0.6ppts from last week's -13.6% (27-Jun-2022). This is Europe's second best week on this measure in the pandemic era and only 0.5 ppts below the level of -12.5% reached four weeks ago, which was Europe's strongest week.

However, it is the seventh successive week stuck in a range between -12.5% and -14.4%.

This week's total seat capacity for Europe is split between 7.6 million domestic seats, versus 8.1 million in the equivalent week of 2019; and 24.4 million international seats, versus 28.7 million.

Europe's domestic seats are down -5.7% versus 2019, compared with last week's -7.8%.

International seat capacity is down -15.1% versus 2019, compared with last week's -15.3%.

Europe: percentage change in weekly airline seat capacity vs equivalent week of 2019, weeks of 06-Jan-2020 to 04-Jul-2022

 

Europe's 3Q2022 is projected at 89%, but further trimming is likely

According to data from OAG and CAPA, Europe's capacity as a percentage of 2019 levels improved with each successive quarter of 2021: it was 27% in 1Q2021, 34% in 2Q2021, 64% in 3Q2021 and 71% in 4Q2021.

Capacity for 1Q2022 was 74% of 1Q2019 levels and 2Q2022 was at 84% of 2Q2019 levels. Projections for 3Q2022 are at 88.7% of 3Q2019 seat numbers, down by just 0.1ppts from last week (27-Jun-2022).

This is further evidence that European airline schedules are now much more stable than at previous times since the COVID-19 pandemic began.

Nevertheless, current projections for 3Q2022 are a little higher than the fairly steady level of around 86% to 87% in the past seven weeks. Further schedule trimming seems likely as a result of staffing and recruitment challenges.

As previously suggested by CAPA, the final outcome for 3Q2022 may be slightly higher than 2Q's 84.3%, but not by very much.

See related CAPA report: Europe aviation: 3Q2022 will struggle to beat 2Q's 84% of 2019 seats

Europe remains fifth in the regional ranking by capacity as percentage of 2019's

Europe remains in fifth place in the ranking of regions measured by seats as a percentage of 2019 levels this week.

With capacity down -13.0%, Europe is 9.1ppts better than sixth placed Asia Pacific, where capacity is down -22.1%.

Europe is just 0.4ppts below the Middle East, where seat count is down by -12.6%. Capacity is down -6.4% in Africa, -5.7% in Latin America, and -4.6% in North America.

North America, Asia Pacific and Europe have taken upward steps in the trend this week, whereas Latin America and Middle East have taken downward steps and Africa is broadly flat on last week.

Percentage change in passenger seat capacity vs 2019 by region, week of 30-Mar-2020 to week of 4-Jul-2022

 

IATA forecasts that only North America's airlines will report a positive EBIT margin in 2022...

The different speeds with which each world region is recovering to its pre-pandemic (i.e. 2019) capacity levels have consequences for airline profitability in each region.

In its Jun-2022 update of its industry financial performance outlook, IATA forecasts that all regions will report much better airline EBIT margins (earnings before interest and tax as a percentage of revenue) in 2022 compared with 2021, but only North America will achieve a positive result.

Asia Pacific's lagging capacity recovery, the result of continuing tight travel restrictions (especially in China) and uneven vaccination rates, is likely to mean a slower recovery of profitability for the region's airlines.

IATA forecasts an EBIT margin of -5.9% for Asia Pacific in 2022 – this is the lowest margin forecast of any region.

…with Europe second, with a margin of -2.6%

By contrast, IATA forecasts that North America's airlines will achieve a positive EBIT margin of +1.9% – the only region expected to return to a positive result in 2022.

North America is also currently leading the capacity recovery (although Latin America has been in the top spot on capacity recovery for much of the year). North America is forecast to benefit from a large US domestic market and good recovery in the main intercontinental traffic flows with Latin America and on the North Atlantic.

IATA's EBIT margin forecasts for the other regions are all in a tight range: -3.0% for Middle East, -2.8% for Latin America and Africa, and -2.6% for Europe.

The EBIT margin forecast for Europe is the second best, behind only North America.

Airline EBIT margins for each main global region, 2020 to 2022F

 

The pace of capacity recovery is clearly important but it is not the only driver of profitability, and there is not a perfect correlation.

The pace of revenue recovery in each region is driven by factors such as the mix of domestic versus international traffic, the level of travel restrictions still in place in other regions that provide a significant share of traffic, and yield development.

Other factors include industry structure and the intensity of competition and cost items, such as labour and fuel (including hedging levels).

Europe's relatively strong EBIT margin forecast in 2022 owes much to the northern summer coming after the removal of travel restrictions and improving yields.

3Q2022 is crucial to European airlines

In 2019, before the pandemic, 3Q accounted for 65% of the annual EBIT of the big five European airline groups (Lufthansa Group, Air France-KLM, IAG, Ryanair and easyJet).

The performance of the 2022 peak summer quarter will be crucial in determining whether Europe can meet, or beat, expectations.

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