Europe Unleashed: For airlines, many of the region’s toughest structural challenges are easing

Outside Scandinavia, anyway, every European airline that reported financial results for the second quarter posted operating margins that were higher this year than last. It’s just one manifestation of an industry escaping many of its toughest structural challenges, from economic stagnation to over-fragmentation to capacity threats from overseas. Here’s a look at some of the key trends and forces currently shaping Europe’s brightening skies:

• The economy is improving: Europe’s GDP grew by well above 2% y/y in the second quarter, reflecting the healthiest business and financial conditions since the start of the global economic recession nearly a decade ago. A booming tourism sector is one important growth driver, leading Spain for example to 3% y/y GDP growth. Sweden and the Netherlands saw growth of almost 4%. Several eastern countries including Poland topped 4%. The continent’s largest economy, Germany, grew a solid 2%, with France and even Italy not far behind. The U.K. held up well with nearly 2% growth despite Brexit concerns. Even the Greek economy expanded almost 1%. Naturally, the encouraging economic performance is translating to strong demand.

• Indeed, demand is strong: It’s not just tourism. Airlines also reported strong premium demand. In addition, demand from Asia recovered from terror attacks a year earlier. Latin American routes recovered too. Transatlantic routes held up well. Cargo demand improved. Legacy carriers grew ancillary revenues while LCCs grew ticket revenues with more customer-friendly policies. The Easter date shift also helped in Q2. As for the super-peak Q3, reporting for which begins soon, Lufthansa for one described the pricing environment as “positive,” while Finnair last month raised its annual profit forecast based partly on summer strength. In its August traffic report, Air France/KLM said mainline unit revenue was up and Transavia’s unit revenue was “clearly” up.

• European currencies appreciate: With stronger economic growth came stronger local currencies, helping airlines stimulate outbound demand overseas while lowering dollar-denominated costs. A…

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