European Reality Check
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European Reality Check
Top airline executives and trade group leaders here are pessimistic: A tepid market still hampers European carriers' near-term outlook, while signs of recovery beckon cruelly like a mirage.
As the year-end draws closer, predictions for a mediocre 2003 are starting to emerge as doubts mount regarding an upturn in 2004.
January-September statistics covering the 31-member Assn. of European Airlines (AEA) show that traffic increased only 1.9% (and no more than 1.4% for freight); average seat load factor dropped slightly to 76.9%. Late last week, however, the AEA released numbers covering the first full week of November and showing "a growth trend 'too late' to produce good year-end figures." The positive traffic level for the whole year is unlikely to exceed +0.5%, according to AEA economists.
Air France Chairman/CEO Jean-Cyril Spinetta commented: "In the last three years, traffic plunged 10%, and we are not yet returning to 2000's levels." Never before has the airline industry experienced anything so devastating, he added. AEA members operate a combined 2,540 commercial transports and carry 303 million passengers and 4.6 million metric tons of cargo annually.
In recent weeks, signs of a looming European air transportation recovery have remained weak or, even worse, displayed contradictory trends--confirming that the industry is still in the doldrums. "We frequently said that non-U.S. players suffered less than Sept.-11-hit carriers. This is still true, but the crisis on the European side is undoubtedly worse than initially expected," an airline analyst pointed out.
For example, AEA members' passenger traffic in September increased 1.4%, a growth level lower than August's. Moreover, historically healthy 75%-plus load factors now hardly bring operators close to break-even points, as yields remain under huge pressure. Excess capacity has been largely eliminated since the crisis erupted in 2001; however, European low-cost carriers' enviable two-digit rise is further pummeling the full-service/network airlines.
In a tight economic climate, the low-fare quest is no longer limited to leisure travelers. The business community is increasingly pursuing new ways to curtail travel expenses and limit overhead, too. Last week, Air France unveiled April-September results showing a 0.5% regression while, on the same day, EasyJet released 12-month figures showing a dramatic 79% traffic increase and a robust 84% load factor.
There are many causes for the "conventional" European carriers' long-lasting, lackluster results--triggering heated debate. AEA economists assert that without the combined negative impact of SARS (severe acute respiratory syndrome) and the war in Iraq, traffic growth this year "would have been in the order of 7%." And the authors of the latest AEA outlook added: "It might reasonably be assumed that a positive [financial] result for 2003 in the region of $1 billion might have been foreseen." Such a claim indirectly assumes the existence of an economic upturn, an analysis that's challenged by other experts.
Adopting the broad view at last month's Cannes Airline Forum, Pierre J. Jeanniot, director general emeritus of the International Air Transport Assn., nevertheless asserted that recovery is underway. This year, the industry can be expected to post an additional $6.5 billion in losses, but the impact will vary significantly by region.
Jeanniot focused on Europe's specific situation, noting that the continent has more experience than the U.S. in handling--and preventing--terrorism, but now faces the all-new assignment of inserting aggressive low-cost carriers into a highly competitive market. The low-costs' emergence does not mean Europe's traditional airline model is obsolete; they offer different products conceived for different markets, he said.
Spinetta, nevertheless, acknowledged that European travelers increasingly seek to benefit from lower, simpler fares and are revising their expectations in terms of inflight service. The French flag carrier is expected to noticeably reorient its domestic/short-haul strategy next spring to counter EasyJet, Ryanair and discount startups.
He believes network majors should certainly not try to create low-cost subsidiaries, but rather adapt to an evolving market and short-haul travelers' new expectations. Despite failures such as British Airways' Go, European flag carriers recently formed low-cost affiliates such as Scandinavian Airlines' Stockholm-based Snowflake.
In a hostile economic context, European airline executives proffer divergent views about the long-term impact of unprofitable operations. "There is a great danger that the industry will not change, will fail to remunerate the cost of capital over a long timeframe, and appear as a nonviable industry," Colin Smith told the Cannes forum. Smith, an aviation consultant, was vice president for international affairs of the former Trans World Airlines.
According to Smith, consumers are quickly shifting their expectations and attitudes about pricing and product, an evolution propelled by the advent of low-cost carriers. "Premium passengers are 'trading down' on short-haul travel, and renewed growth will mask underlying problems; the Internet creates availability and 'perfect' competition--no other industry has such an instant access to pricing," he pointed out. "High costs have defeated the legacy carriers," he concluded.
Although not sharing Smith's pessimistic analysis, Spinetta acknowledged that the U.S. full-service-airline business model may be running out of steam, suffering from an excessive cost base exacerbated further by a drift in salary scales. However, he said it would be an error to assert that the European business model is being similarly challenged, although no more than four or five European majors are weathering the crisis successfully.
He predicted that the new Air France-KLM Royal Dutch Airlines "near-merger" would show the way and signal the possibility to implement a long-overdue consolidation strategy. "Looking beyond the [current] crisis, in the next few years, Europe will sustain 'a few' big-network airlines complemented by partners and affiliates, point-to-point carriers such as Swiss and SN Brussels Airlines, charter operators and low-cost carriers."
Europe's basic political-economic strategy has been to create a large single market that's now a reality. Trading rules and market forces significantly evolved over the years, but the European airline industry's structure remained unchanged, sustaining a national champion in each country. "This is obsolete and out of phase with reality," Spinetta warned.
As the year-end draws closer, predictions for a mediocre 2003 are starting to emerge as doubts mount regarding an upturn in 2004.
January-September statistics covering the 31-member Assn. of European Airlines (AEA) show that traffic increased only 1.9% (and no more than 1.4% for freight); average seat load factor dropped slightly to 76.9%. Late last week, however, the AEA released numbers covering the first full week of November and showing "a growth trend 'too late' to produce good year-end figures." The positive traffic level for the whole year is unlikely to exceed +0.5%, according to AEA economists.
Air France Chairman/CEO Jean-Cyril Spinetta commented: "In the last three years, traffic plunged 10%, and we are not yet returning to 2000's levels." Never before has the airline industry experienced anything so devastating, he added. AEA members operate a combined 2,540 commercial transports and carry 303 million passengers and 4.6 million metric tons of cargo annually.
In recent weeks, signs of a looming European air transportation recovery have remained weak or, even worse, displayed contradictory trends--confirming that the industry is still in the doldrums. "We frequently said that non-U.S. players suffered less than Sept.-11-hit carriers. This is still true, but the crisis on the European side is undoubtedly worse than initially expected," an airline analyst pointed out.
For example, AEA members' passenger traffic in September increased 1.4%, a growth level lower than August's. Moreover, historically healthy 75%-plus load factors now hardly bring operators close to break-even points, as yields remain under huge pressure. Excess capacity has been largely eliminated since the crisis erupted in 2001; however, European low-cost carriers' enviable two-digit rise is further pummeling the full-service/network airlines.
In a tight economic climate, the low-fare quest is no longer limited to leisure travelers. The business community is increasingly pursuing new ways to curtail travel expenses and limit overhead, too. Last week, Air France unveiled April-September results showing a 0.5% regression while, on the same day, EasyJet released 12-month figures showing a dramatic 79% traffic increase and a robust 84% load factor.
There are many causes for the "conventional" European carriers' long-lasting, lackluster results--triggering heated debate. AEA economists assert that without the combined negative impact of SARS (severe acute respiratory syndrome) and the war in Iraq, traffic growth this year "would have been in the order of 7%." And the authors of the latest AEA outlook added: "It might reasonably be assumed that a positive [financial] result for 2003 in the region of $1 billion might have been foreseen." Such a claim indirectly assumes the existence of an economic upturn, an analysis that's challenged by other experts.
Adopting the broad view at last month's Cannes Airline Forum, Pierre J. Jeanniot, director general emeritus of the International Air Transport Assn., nevertheless asserted that recovery is underway. This year, the industry can be expected to post an additional $6.5 billion in losses, but the impact will vary significantly by region.
Jeanniot focused on Europe's specific situation, noting that the continent has more experience than the U.S. in handling--and preventing--terrorism, but now faces the all-new assignment of inserting aggressive low-cost carriers into a highly competitive market. The low-costs' emergence does not mean Europe's traditional airline model is obsolete; they offer different products conceived for different markets, he said.
Spinetta, nevertheless, acknowledged that European travelers increasingly seek to benefit from lower, simpler fares and are revising their expectations in terms of inflight service. The French flag carrier is expected to noticeably reorient its domestic/short-haul strategy next spring to counter EasyJet, Ryanair and discount startups.
He believes network majors should certainly not try to create low-cost subsidiaries, but rather adapt to an evolving market and short-haul travelers' new expectations. Despite failures such as British Airways' Go, European flag carriers recently formed low-cost affiliates such as Scandinavian Airlines' Stockholm-based Snowflake.
In a hostile economic context, European airline executives proffer divergent views about the long-term impact of unprofitable operations. "There is a great danger that the industry will not change, will fail to remunerate the cost of capital over a long timeframe, and appear as a nonviable industry," Colin Smith told the Cannes forum. Smith, an aviation consultant, was vice president for international affairs of the former Trans World Airlines.
According to Smith, consumers are quickly shifting their expectations and attitudes about pricing and product, an evolution propelled by the advent of low-cost carriers. "Premium passengers are 'trading down' on short-haul travel, and renewed growth will mask underlying problems; the Internet creates availability and 'perfect' competition--no other industry has such an instant access to pricing," he pointed out. "High costs have defeated the legacy carriers," he concluded.
Although not sharing Smith's pessimistic analysis, Spinetta acknowledged that the U.S. full-service-airline business model may be running out of steam, suffering from an excessive cost base exacerbated further by a drift in salary scales. However, he said it would be an error to assert that the European business model is being similarly challenged, although no more than four or five European majors are weathering the crisis successfully.
He predicted that the new Air France-KLM Royal Dutch Airlines "near-merger" would show the way and signal the possibility to implement a long-overdue consolidation strategy. "Looking beyond the [current] crisis, in the next few years, Europe will sustain 'a few' big-network airlines complemented by partners and affiliates, point-to-point carriers such as Swiss and SN Brussels Airlines, charter operators and low-cost carriers."
Europe's basic political-economic strategy has been to create a large single market that's now a reality. Trading rules and market forces significantly evolved over the years, but the European airline industry's structure remained unchanged, sustaining a national champion in each country. "This is obsolete and out of phase with reality," Spinetta warned.
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W.r.t. Despite failures such as British Airways' Go ... what ? Time for a quick reminder:
BA invested £25m in Go and then, only a few years later, they sold it to Investors in Inducstry ( 3i ) for £110m.
...... and, within a year of that, 3i sold it on to EasyJet for £300m ....... now that is some failure !
BA invested £25m in Go and then, only a few years later, they sold it to Investors in Inducstry ( 3i ) for £110m.
...... and, within a year of that, 3i sold it on to EasyJet for £300m ....... now that is some failure !
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I'll forgive the report as it is a commentary as much as anything. However, saying that this year's growth would have been 7% if it weren't for Iraq and SARs after asserting that the growth for 2004 is not looking as good as hoped is a little contradictory.
Probably more likely that 7% this year would have been rediculous regardless of Iraq or SARs.
My personal opinion is that in the near future there will be more flights with fewer passengers in smaller planes from more airports and that long-haul will not recover for many years. Overall, near zero growth but yet another paradigm shift.
Probably more likely that 7% this year would have been rediculous regardless of Iraq or SARs.
My personal opinion is that in the near future there will be more flights with fewer passengers in smaller planes from more airports and that long-haul will not recover for many years. Overall, near zero growth but yet another paradigm shift.
