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Coming Year will Define Which Airline Got it right

05/22/2008| 2:18:00 PM| 中文

British Airways has reported an operating profit of GBP 875 million for the 12 months ended 31-Mar-08, on revenues up 3.1%, to GBP8,753 million.

British Airways has reported an operating profit of GBP 875 million for the 12 months ended 31-Mar-08, on revenues up 3.1%, to GBP8,753 million.
 
British Airways’ 10% operating profit margin (FY2007/08, including a 6.6% 4Q operating profit) is outstanding in comparison to the feeble airline industry standards, where three or four percent returns have generally been regarded as good.
 
Strategic positioning, not just short-term performance, will be essential to survival in the longer term as the economic outlook shrivels and liberalization and consolidation spreads.
 
This will be a necessary step in determining which airline will come out of the next downturn best.
 
British Airways, unable to consummate the purchase of Iberia and with its Heathrow gateway dominance being diluted, has stressed financial performance – and succeeded well in that respect.
 
But it has apparently not positioned well for a world that looks likely to be dominated by mega-airlines, unlike its major continental rivals.
 
Lufthansa, reporting 1Q08 financials last month, also experienced good recent conditions, recording a 19% increase over the first quarter of 2007, with an improved operating margin at just over 4%. It follows a FY2007 operating margin of a little above 6%.
 
BA expects Q1 of its new financial year to be “particularly difficult”, citing a doubling of oil prices compared with the first quarter of 2007. Delays in moving into T5 have also hindered economic performance. The full year will be “challenging, against an uncertain economic outlook”.
 
Unlike British Airways, Lufthansa has placed its strategic emphasis on expansion by acquisition in Europe, even crossing the Atlantic to buy 19% of JetBlue. Even more ominously, Lufthansa also threatens to challenge more aggressively at Heathrow if it proceeds with acquiring a controlling holding in bmi.
 
CEO, Wolfgang Mayrhuber, managed in April to sound a lot more upbeat about the future, albeit with some resounding caveats, remaining “confident that (Lufthansa) will be able to attain an operating result for 2008 that matches the record figures achieved last year and intends to record further improvements”.
 
Mr Mayrhuber believed this was still “possible despite the fact that the worldwide economic conditions have worsened perceptibly. Precondition is, however, that the market environment does not weaken further and that the Lufthansa Group can continue to successfully compensate the increased fuel prices as it has done in the past.”
 
Sadly though, neither of these appears likely, especially as oil prices have increased another.
 
The third of the big three Europeans, Air France/KLM, reports its full 2007 year financials on Thursday this week. In Feb-08, it reported that the first nine months of its financial year to Dec-07 were very strong, with an “adjusted” operating margin of 8.7%. Assuming a similar result to Lufthansa and British Airways for early 2008, Air France too can almost certainly be expected to complete a very successful full year. In Feb-08, the carrier reported “robust forward bookings in long-haul premium class” and “less dynamic forward bookings in low yield”. Its take on the future will be watched carefully when the full year results are announced.
 
Each of the three airlines suffered a slowdown in discretionary/low yield traffic in the last three months of 2007 and similarly pointed to still-strong long haul markets, showing premium traffic performing well.
 
Long-haul is where their focus can now be expected, but British Airways is not alone in suggesting that older capacity may be grounded earlier than previously projected, as conditions deteriorate. (OAG sector figures for May-08 show growth in flight numbers within Europe slowing by 50% to just a 2.6% increase year on year; however, long haul flights to/from Asia [not all from European airlines] are up 13.7% over the comparable period.)
 
And, as oil prices nudge USD130 per barrel, with projections of USD140 and USD200 being aired, the outlook over the next few months will clearly be dominated by that external, uncontrollable influence.
 
British Airways CEO, Willie Walsh, estimated that, even with existing hedges, USD120 oil would translate to an extra GBP1billion in the coming financial year, well above this year’s profit.
 
BA holds strong cash reserves, GBP1.8 billion (EUR2.3 billion) and Air France/KLM, also with a healthy bank balance, has reduced its gearing to 0.23%. Lufthansa, meanwhile, in buying mode, sat on just over EUR2 billion in cash at the end of March.
 
If the financial outlook is indeed as challenging as it is starting to appear, with declining demand and increasing fuel costs, long term relative strategies are going to be severely tested.
 
British Airways, cashed up and relatively well-geared; Lufthansa well into a dominance-through-acquisition strategy; and Air France/KLM, the largest combined airline in the world, also financially strong, each offer a stark contrast of style.
 
BA will be hoping that the mega-airline actually becomes the dinosaur, while Lufthansa would prefer to position as the elephant which can squash the cat.
 
Meanwhile, Air France/KLM might just have got the timing of their consolidation just right - although the same synchrony might not apply to jumping into a cross-Atlantic acquisition of Delta-Northwest at present.
TAGS: BA | Lufthansa | KLM
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