Europe’s legacy airline groups upbeat on unit revenue despite wider Q1 losses

Europe’s big three legacy airline groups collectively reported a wider net loss in 1Q2017 compared with the same period a year earlier. However, this deterioration was largely due to unrealised falls in the value of derivatives and currency translation items. At the operating result level, they collectively grew the combined profit and two of the three, IAG and Lufthansa, improved their operating margin. Air France-KLM’s margin declined as a result of currency movements.

Perhaps the most consistent encouraging message from the big three European legacy airline groups is related to unit revenue. Although still falling, for all three the rate of year-on-year decline eased in 1Q2017 compared with 4Q2017. Their commentary on the outlook for unit revenue trends was also hopeful, although the capacity growth outlook in markets from Europe remains relatively high by comparison with historical trends, and geopolitical risks are always present.

Among the three groups, IAG continued to be the most profitable in margin terms. In the point-to-point/LCC segment – an increasingly important battleground – IAG’s Vueling is growing at the slowest rate, but Lufthansa’s Eurowings/Brussels Airlines combination and Air France-KLM’s Transavia made bigger losses.

The underlying unit revenue trends for the three groups can be seen in figures they publish for passenger revenue per available seat kilometre (RASK) at constant currency. For IAG, passenger RASK at constant currency fell by 3.1% year-on-year in 1Q2017, compared with -4.3% in 4Q2016. For Lufthansa Group, it fell by 1.1%, versus -5.9% in 4Q2016; and for Air France-KLM, it was reduced by just 0.5%, compared with -5.3% in 4Q2016.

IAG predicted that its passenger RASK at constant currency would show a year-on-year increase in 2Q2017. Although Air France-KLM did not explicitly forecast unit revenue, it said that forward bookings indicated a “resilient start to the second quarter”, with long haul bookings ahead by 3-4ppts for April to July. Management told analysts on a conference call to discuss the 1Q2017 results on 4-May-2017 that this was not due to price stimulation. For Lufthansa Group, after taking account of the Brussels Airlines acquisition and the growth of Eurowings, passenger unit revenue may have been close to flat year-on-year in 1Q2017.

Air France-KLM was slightly bigger than the other two groups in ASK terms in 1Q2017, in spite of Lufthansa’s consolidation of Brussels Airlines into its group. Air France-KLM’s 70.8 billion ASKs compared with 68.8 billion for the Lufthansa Group, and 68.3 billion for IAG. In revenue terms, Lufthansa increased its lead as the largest of the three, with EUR7.7 billion versus EUR5.6 billion for Air France-KLM, and EUR4.9 billion for IAG.

Most analysts are currently forecasting improved full year profits for each of the big three legacy airline groups in 2017. At first sight, given that Air France-KLM’s 1Q operating margin declined and margins in Lufthansa’s airline segments also declined, this might seem a little surprising.

However, for most European airlines, the first quarter is typically the weakest in margin terms and is rarely a reliable guide to the full year. The operational gearing of the airline business means that relatively small improvements in revenues can make a big difference to profits, particularly in the summer period, when most of the full year profit is made.

READ MORE… Air France-KLM, Lufthansa Group, IAG: Europe’s legacy airline groups upbeat on unit revenue after 1Q