Yesterday’s plunge in the stock markets did the major travel companies no favours. The FTSE 100 index fell almost 4.7% and down went Tui Travel and Thomas Cook with it.
Cook fell back 6.75% and Tui Travel 4%, despite the latter reporting a decent late summer and year-end figures in line with expectations.
EasyJet was one of the few to buck the trend with a 9% rise in value after it forecast record profits and gave notice of a dividend pay-out. Other major carriers fared nowhere near so well. British Airways’ parent IAG was down 5%, Air France-KLM plunged 8.6% in Paris, and Lufthansa was down 5.5% in Frankfurt.
The German DAX was down 5%, so no great surprise there. But Lufthansa has had a torrid week – down 18% on last Friday after it issued a profit warning on Tuesday.
Europe’s biggest carrier is still set to make substantial profits this year, but the warning was unexpected. The German market had been booming – both business and leisure travel – and Lufthansa had planned to increase capacity accordingly. Not any more: a plan in March to raise capacity this year by 12% fell back in July to 6% and will now be cut again.
Lufthansa had previously forecast profits this year would exceed those of 2010 when it made euro876 million (£765 million). Analysts had expected closer to euro1 billion for 2011. But on Tuesday, the carrier announced: “The target of a further increase on the previous year’s figure no longer appears achievable.” Small wonder Lufthansa is examining its options for disposing of BMI, which lost £106 million in the first six months of this year.
This may prove tricky – although I’m not suggesting BMI is the reason for the profit warning. Despite claims to the contrary in the travel press, it is nigh-on impossible to see British Airways walking off with all BMI’s slots at Heathrow – thereby bagging more than half the total at the airport. Indeed, the fact BA has just bought a handful of BMI slots suggests it recognises as much. (The argument that Lufthansa has a higher proportion of slots at Frankfurt is irrelevant. There are empty slots available at Frankfurt, Schiphol and Paris Charles de Gaulle if a carrier wants to apply for them. There are no slots at Heathrow unless another carrier opts to sell.)
But back to that Lufthansa profits warning. It came on the day BA announced “the opening of a new chapter” – in chief executive Keith Williams’ words – and its biggest brand-advertising campaign in a decade. BA believes it has turned a corner – with its spanking new Heathrow terminal, its merger with Iberia, its transatlantic partnership with American Airlines and its painful dispute with cabin crew in the past.
- A tale of two ads: American’s easy flight vs BA’s historic one [Web editor’s blog]
In many ways, undoubtedly, BA has done so. Its plans for capacity growth this year were more modest than Lufthansa’s, at 7%-8%, and could be revised down this winter. However, as Williams told the audience assembled for a preview of BA’s classy new TV ad, launched on Wednesday: “The industry has been through difficult times, periods of severe disruption, record oil prices and the deepest recession since the 1930s, but BA has emerged from it.”
Yet I fear he may have spoken too soon. Lufthansa’s profit warning is a symptom of the new phase of the economic and financial crisis we have entered. Germany has since 2009 been pretty much the only economic-success story in Europe. The slowdown in Germany is a symptom of the wider global slowdown. The world’s second-largest exporter of manufactured goods – and until last year the largest – Germany is a bellwether for the health of the world economy. So the country’s declining health does not bode well.
It is not good news for the eurozone, which requires German largesse. It is not good news for exporters to the euro area – the UK’s biggest export customer. It is not good news for UK banks, which stand to suffer collateral damage when Greece defaults on its debt. And it does not bode well for Europe’s biggest travel market, which has been the reason Tui Travel and Thomas Cook have done rather better this year than they might otherwise.
All in all, this is one time when it would be better if the Germans won.