It could be a long, hot, expensive summer—at least if you're a European airline.
The grounding of Boeing's 737 Max jet—whose fuel efficiency is especially popular with low-cost carriers in competitive markets—is the focus of this earnings season, as is the lingering financial pain the crisis is likely to cause.
But look beyond the Boeing debacle, and you'll see plenty more that is keeping airline bosses up at night: Rising jet fuel prices. Strained labor relations. The risk of a no-deal Brexit. The sheer day-to-day business of being a European airline.
It's enough to ruin a summer holiday.
On Monday, Irish low-cost carrier Ryanair—famed for its cheap tickets to European holiday capitals—reported quarterly post-tax profit that was down 21%, as its ticket fares slid 6% in order to lure passengers. That trend is expected to continue for the rest of the summer, the company said—bad news, given that summer is typically when the carrier does best.
Meanwhile, German giant Lufthansa said Tuesday that net profit had dropped by 70% for the quarter, which the company's CFO blamed on "tough competition and sizable overcapacities." In other words, competition from the Ryanairs and easyJets of Europe, paired with a continent-wide struggle to get bums in seats. To pick up profits, it pledged to slash costs and turn around its own low-cost carrier, Eurowings—not an easy prospect when Ryanair, the low-cost incumbent, is itself struggling.
For close watchers of the European airline business, the gloominess won't come as a shock.
The recent headlines have weighed on the aviation industry, as they have on every other sector this earnings season. Economic growth is dragging, trade war pains (especially, but not only, between the U.S. and China) are mounting, and Brexit is the mood-dampener that never seems to end, flogging consumer confidence, in particular. It all adds up to a case of summer malaise.
The industry-unique challenges, too, are familiar. The European carriers operate in an industry famed for its brutal competition, with dozens of carriers competing for paper-thin margins, and relying on "extras" (baggage fees, car rentals, food and drink) to plump up profits.
That brutal battleground has already claimed multiple victims over the last two years: Monarch, Air Berlin, Azur, and Icelandic carrier WOW, which went belly-up in March. There was hope that such consolidation would mean higher profits for surviving carriers, but if Ryanair and Lufthansa are any indication, the gains haven't been widespread.
Instead, Ryanair has slashed prices to woo Germans and Brexit-stressed Britons onto flights, and Lufthansa admitted earlier this month that it will take a loss to keep or expand its market share in the crowded regional market in and around Germany.
And just as carriers are slashing flight prices, their costs are going up. Ryanair's fuel bill rose 28% in 2018—an industry-wide strain, with jet fuel one of the largest costs for most airlines—while its payroll costs went up 28%, too, after the company struggled with strikes and other labor disputes. Lufthansa also said rising fuel and maintenance costs had hurt its bottom line.
The moral is that when margins are already so squeezed, any cost rise hurts—and when your business is based on sheer scale, reducing fuel costs and slashing your payroll doesn't look so easy, either.
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