Off-Peak Seasonal Disorder: Europe’s airlines did well in general during Q3. But will recent trends foster full-year success?
At first glance, Europe’s airline industry might look every bit as healthy as its U.S. counterpart. After all, the collective operating margin of its 11 largest publicly-traded carriers was 17% last quarter, almost equal to the 18% earned by America’s 10 largest airlines. But first glances can be deceiving.
Sure, Europe’s airlines did just as well as their American peers in the peak third quarter. But consider what happened in this year’s wintry first quarter: U.S. carriers managed through the slow season with a 16% operating margin, whereas in Europe, that figure was negative 1%. Europe’s airline sector, in other words, still suffers from off-peak seasonal disorder.
Performance, furthermore, varies more widely among European carriers than it does among U.S. carriers. Ryanair’s astonish ing 43% Q3 operating margin was galaxies away from Air Berlin’s 5%, with IAG, Lufthansa and Air France/KLM earning 11%, 13% and 19%, respectively. In the U.S., Delta, United and American were bunched together between 16% and 19%, while no other carrier did worse than 19% or better than 27%.
It wasn’t all that long ago—the mid-2000s—when Europe’s airlines were looking down upon their U.S. brethren with pity. At that time, big U.S. airlines were being torn apart by extreme fuel prices, market fragmentation, high labor costs, overcapacity and a low-cost carrier onslaught, while Europe’s big carriers enjoyed a buffer against high fuel prices thanks to a weak U.S. dollar—and a wealth of longhaul opportunities in emerging markets. They also faced LCC, Gulf, Turkish and Chinese rivals that were much smaller than they are today.
Since the start of the decade, U.S. carriers have consolidated, trimmed capacity and turned their once-ailing domestic market into a profit center, surrounded by a moat of massive ancillary revenues, including billions of dollars (each!) from frequent flier plans with more members (also each) than the population of Germany. Europe, meanwhile, approaches 2017 with a highly fragmented competitive landscape, much smaller frequent flier plans, a less healthy economy, more overall exposure to increasingly competitive and soft -demand longhaul markets, weak local currencies inflating costs, troubled competitors revitalized with foreign investment and few answers to the riddle of how to stay profitable in the winter…
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