European airlines: premium yields no safe haven as structural cracks appear

British Airways’ CEO, Willie Walsh, reporting on last year’s results and the 2008 outlook last week, looked to long-haul premium markets to offer the UK carrier a warm space in what is becoming a very challenging marketplace.

As short-haul carriers like Ryanair anticipate eagerly the long anticipated “bloodbath” within Europe, network airlines must hope that their hold on long-haul markets will provide a lifeboat in the stormy weather ahead. But on long-haul too, industry structural changes are appearing that may undermine traditional strongholds.

IATA’s report yesterday on March conditions will not be welcome news, either for British Airways or for other long-haul European operators looking for comfort on intercontinental routes. Citing the “largest absolute decline of this size since 2003”, it noted that international premium travel continued a deterioration “that began late last year”.

Attributed to slowing US and financial sector conditions generally, premium traffic shrank 3.9% in the month of March. Adjusting this number to take account of the early Easter (which reduced business travel) and the effects of an extra day in February, premium passenger numbers fell an estimated 1-2% for the month – still showing that “this highly cyclical premium market has clearly slowed sharply and is now shrinking”, according to IATA.

Passenger Traffic Growth by Ticket Type
Source: IATA

By way of comparison, when the dot-com bubble burst in 2000, March yields overall for several major European airlines immediately fell by as much as 4%. After peaking at 5,050 on 10-Mar-00, the IT-heavy NASDAQ share index had fallen 9% over the following three days, signalling an abrupt end to the parallel bubble of premium air travel.

We are apparently not yet seeing the sort of steep declines that occurred then, but, as global economies fall into line with the US and as major companies become more risk-conscious, the prospect looms of a remorseless but more drawn-out slowdown.

But the bad news for Europe’s flag carriers – which rely predominantly on end-to-end traffic - does not end there. While, for example, May has experienced a 14% increase in flight frequencies to/from Asia, the Europe-Far East premium travel market performed weakest of all global route groups in March, along with intra-Europe.

More ominously, for the same period, Europe-Middle East and Middle East-Far East premium yields actually increased, by 5.9% and 17.3% respectively, despite the region’s airlines also adding capacity.

Premium traffic growth by Route: Mar-08 (year-on-year)
Source: Centre for Asia Pacific Aviation & IATA

The rise and rise of Middle East sixth freedom airlines, notably Emirates, Qatar Airways and Etihad, has caused increasing concern among third and fourth freedom operators at each end of the Europe-Asia Pacific routes. These early numbers suggest that the intermediate carriers may be the major beneficiaries of an economic slowdown on these long-haul routes.

Meanwhile, US routes are exhibiting mixed signals, as the weaker US dollar encourages exports (and US exporters, travelling premium class), as well as encouraging inbound discretionary tourism. Consequently, North Atlantic and Pacific premium markets “have been held up” by these factors, says IATA.

But, within-Europe routes, which account for a quarter of all global premium passengers (but only a tenth of revenue) have fallen off a cliff, with passenger numbers down 17.1% against March last year on an unadjusted basis.

Another strategy Mr Walsh talked about last week was the premature grounding of older equipment. That approach is looking increasingly attractive. It would almost certainly hasten global structural change.

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