Aviation is key to travel from Britain, as the volcanic ash crisis clearly showed in 2010. Yet most airlines still struggle to make money. Ian Taylor reports
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Flights may be a means to an end for most holidaymakers, but UK outbound travel can’t do without them.
Four out of five leisure travellers depart the UK by air and airline association Iata reports its members in Europe have enjoyed a near 6% rise in revenue this year to the end of September. Yet Iata estimates Europe’s airlines have collectively lost in excess of £750 million on flying this year.
Of course, the financial state of carriers varies enormously. Budget giants Ryanair and easyJet sit outside Iata and are in rude good health.
RYANAIR
Ryanair announced a 10% rise in profits to €596 million (£477 million) for the half year to September and chief executive Michael O’Leary is not complaining when he says: “We expect market conditions to remain tough. Further airline failures are inevitable.”
In this environment, says O’Leary, “Ryanair sees substantial opportunities to grow”. He believes Ryanair can capture more of the 580 million short-haul passengers that he estimates fly on carriers that aren’t making money.
The only disappointment for O’Leary is that he appears unlikely, at this stage, to get his hands on Aer Lingus, with Europe’s competition commissioner poised to rule against Ryanair’s third bid for its Irish rival.
The downside for agents is that Ryanair remains as hostile as ever to the trade. Despite some online travel agents (OTAs) booking a majority of their customers with Ryanair, O’Leary dismisses the sector as “a bunch of scam artists”.
EASYJET
EasyJet is smaller than Ryanair but in equally good shape. The carrier’s full-year figures, due out this week, were expected to show a profit close to £300 million.
About half easyJet’s passengers fly on services to and from the UK and half from bases elsewhere around Europe as the airline extends its reach into North Africa and, from next spring, to Moscow.
EasyJet will take its number of routes from Gatwick to more than 100 when it starts flights to Kalamata in Greece and Santiago in Spain next summer. Yet the closure of easyJet’s Madrid base this autumn was a sign of the pressure on all carriers from a weak economy and strong oil price.
BRITISH AIRWAYS
The picture beyond the budget carriers is mixed and nowhere more so than at International Airlines Group, parent company of British Airways.
BA had a solid nine months to September, producing an operating profit of €286 million (£230 million). However, this was all but wiped out by the loss at sister airline Iberia, prompting the latter’s management to declare: “Iberia is in a fight for survival.”
IAG will slash almost one in four jobs and 15% of capacity at the Spanish carrier, with agreement demanded of unions by the end of January or the cuts will go deeper.
For IAG boss Willie Walsh this is no re-run of his dispute with BA cabin crew in 2010-11: it extends to pilots, engineers and ground staff, in circumstances where the whole of Spain is in crisis. The confrontation threatens significant disruption.
By contrast, BA itself is in good shape after completing the takeover of BMI in October. The carrier’s position at Heathrow and Gatwick has seldom been stronger. BA can expand at Heathrow using former BMI slots. It’s enjoying the fruits of its transatlantic deal with American Airlines and recently welcomed Qatar Airways to the Oneworld alliance.
In addition, BA is set to become the first airline to operate both the Boeing 787 and Airbus A380 when it takes delivery of both next year.
VIRGIN ATLANTIC
Virgin Atlantic’s year has been rather different, although this hasn’t stopped the carrier responding in style.
The airline lost out to BA in its bid for BMI. Then when it sought to take over BMI’s London-Moscow flying, it lost out again as the CAA opted for easyJet.
Virgin still hopes to pick up 12 pairs of former BMI slots at Heathrow and has pledged to start flying from Edinburgh and Aberdeen if it wins them. The airline will also diversify from its focus on long-haul to begin shuttle services between Manchester and Heathrow next March.
The carrier has still found time and money to revamp its Upper Class cabin, bring in new aircraft and launch to Vancouver, Cancun and Mumbai. If Virgin wins the slots at Heathrow, the additional routes this would allow could prove of interest to agents.
Virgin just needs to find an alliance partner and a new chief executive to replace the departing Steve Ridgway.
EUROPEAN CARRIERS
Of the other major European airlines, Lufthansa reported operating profits of €626 million (£500 million) for the nine months to September. Yet the carrier still insisted: “We don’t have the level of profitability we need.”
Air France-KLM announced an operating loss of €157 million for the same period, following losses totalling almost €3 billion in 2009, 2010 and 2011. However, the carrier continues to offer extensive services from UK regional airports – serving 17 in all – to its twin hubs of Amsterdam Schiphol and Paris Charles de Gaulle.
MIDDLE EASTERN MIGHT
These so-called legacy carriers are under pressure not just from the economic downturn and no-frills competition, but also from the explosive growth of Middle Eastern carriers Emirates, Etihad and Qatar Airways.
These continue to expand their global networks at a staggering rate. In the words of Qatar chief executive Akbar Al Baker: “Qatar takes delivery of a new aircraft every 15 days; next year [2013] it will be every 12.”
Qantas recently tore up its long-time partnership with BA and threw in its lot with Emirates as it struggles to turn around a lossmaking long-haul operation.
COST PRESSURES
Air Passenger Duty (APD) on flights from the UK doesn’t help, but the real problem on long-haul is the high oil price. Fuel makes up more than 30% of total operating costs and an even bigger proportion of long-haul fares, and there is little airlines can do about it apart from spend a fortune on new, more fuel-efficient aircraft.
It’s the economics of long-haul that led Kuala Lumpur-based Air Asia X to give up on the UK this year after trying to make a success of operations from Stansted and Gatwick, and business-only carrier Hong Kong Airlines to give up on Gatwick despite the demand we are told there is for China.
CLOSER TO HOME
Nearer to home Hungarian carrier Malev folded, as did Spanair of Spain. BA swallowed BMI and Aegean Airlines is in the process of swallowing Olympic Air. Further consolidation is inevitable as the big five – Ryanair, easyJet, IAG (BA), Lufthansa and Air France-KLM – increasingly dominate Europe’s skies.
There is a space for regional carriers within this – the likes of Monarch, Jet2.com and Flybe – although the space may be increasingly squeezed.
Scandinavia’s SAS is the latest to feel the heat. Having lost money for eight of the last 10 years, SAS announced last week that it could go bust without staff accepting immediate pay and pension cuts.
SAS is under pressure not just from Ryanair and easyJet but from rapidly expanding Scandinavian budget carrier Norwegian Air Shuttle, which will open a base at Gatwick next year – though it may struggle against the established budget airlines.
LONG-HAUL ROUTES
Long-haul flying will remain somewhat more open, with the Middle Eastern trio offering powerful alternative networks to Europe’s three global carriers, and long-standing names, such as Singapore or Malaysia Airlines, retaining important shares in their home markets.
Across the Atlantic, US carriers should finally emerge from more than a decade of restructuring as they upgrade fleets and cabins.
The world’s biggest carrier, United Airlines, now merged with Continental, will be first in the US to fly the Boeing 787 (from early 2013). American Airlines should emerge from bankruptcy protection and, along with Air France-KLM partner Delta Air Lines, move to offer cabins and services more in line with the best elsewhere.
South of the US, Latam Airlines – formed from this summer’s merger of Lan of Chile and Tam of Brazil – should offer competitive services across Latin America and the South Atlantic.
CHARTER AIRLINES
The main UK charter carriers look set for somewhat contrasting fortunes, at least in the short term.
Thomson Airways will become the first UK carrier to fly the Boeing 787 next year, commencing flights to Orlando and Cancun as part of its summer 2013 programme.
Thomas Cook Airlines won’t have anything comparable to shout about and, having reduced in size over the past year, may see further contraction when new Thomas Cook group chief executive Harriet Green concludes her review of the business next April.