Europe’s economic woes have hit the continent’s legacy airlines very hard. In 2012 Air France–KLM reported operating losses of €353 million ($482 million). The same year, International Airlines Group (IAG), the parent company of British Airways and Spanish carrier Iberia, reported a €23 million ($31.4 million) loss. In 2013, Air France-KLM registered operating profits of €132 million $180.2 million), while IAG booked €770 million ($1.1 billion), and are on track to post stronger results this year. Prospects for Europe’s major carriers are improving, due to both a better macro environment and cost-cutting efforts.
First things first: more people are traveling. Global first- and business-class travel rose slightly more than 4 percent year over year in February, according to the International Air Transport Association (IATA), which also reports that 76 percent of global carriers expect prices to increase over the course of the next year.
But they’ve done the hard work, too. Europe’s carriers have emerged from the crisis leaner and more efficient, having cut costs and consolidated their flight offerings to focus on key international routes. Thanks in large part to these restructuring initiatives, the continent’s three largest airline companies are on track to report positive earnings for the whole of 2014. Credit Suisse projects annual operating profits for Lufthansa of €1.7 billion ($2.3 billion) and €832 million ($1.1 billion) for Air France-KLM. The bank anticipates operating profits of €1.4 billion ($1.9 billion) for IAG.
But with recovery comes the potential for overconfidence. “We see 2014 as a game of protection for the European legacy carriers,” Credit Suisse’s European transportation analysts write in a report entitled “European Airlines: Next Steps to Value Creation.” “[R]estructuring [will] continue to bear fruit on the cost side… as long as management can avoid giving cost savings back through lower prices.”
Historically, as confidence recovers, carriers tend to respond by increasing capacity. This time is no different. After remaining flat in 2012 and 2013, total capacity on transatlantic routes is poised to grow 7 percent through 2014. London’s Heathrow airport, Europe’s largest transatlantic hub, should see a 2 percent increase in second quarter capacity and 4 percent in the third, according to Credit Suisse. U.S.-based United Airlines and Delta Airlines are adding more flights at Paris’ Charles de Gaulle Airport, while Lufthansa and Air Berlin are increasing the number of seats available on flights out of New York’s John F. Kennedy International Airport.
But increased supply may not necessarily result in lower prices, according to Credit Suisse, given that some 60 percent of the new seats are on transatlantic routes where European carriers and their partners already hold near-monopolistic positions. And they’re also cutting capacity where they don’t: Forty-three percent of seats European carriers are cutting this quarter are on routes dominated by competing airlines, and 37 percent are on routes where they and their alliance partners hold less than 40 percent market share. Europe’s airlines are playing it safe by focusing on routes where they are already the dominant player, rather than trying to challenge competitors in their strongholds. This careful fine-tuning “suggests low appetite to compete aggressively on price, despite capacity growth,” Credit Suisse explains. Like the rest of Europe’s economic recovery, European airlines’ return to profitability remains shaky – but for the first time in years, they seem to be on the right track