European carriers seem to be bracing for a tough summer as a glut of capacity combines with Brexit impasse, stuttering economic growth and high fuel prices, to squeeze their margins.
Irish no-frills airline Ryanair Holdings recently joined a chorus of European carriers in warning that a fare war, weaker economies and Brexit uncertainties may hold back profit this year.
Ryanair is exposed to any Brexit fallout, with Britain accounting for about one-quarter of its revenues.
Market leader Deutsche Lufthansa AG has frozen expansion at its discount arm, while British global travel company Thomas Cook Group’s bonds are reportedly at a “record low” as it suffers from an oversupply of hotel rooms as well as plane seats.
Eight airlines have already gone bust or hit financial trouble in Europe during the past two years as headwinds hit the continent’s aviation industry, mainly due to the Brexit deadlock.
A major reason cited for a series of failures, which are mostly smaller airlines, is that Europe has an awful lot of airlines! At the heart of the problem is that there are simply too many seats and not enough people to occupy those.
More than 200 airlines offer scheduled services within Europe. On the other hand, in the North American market, including Canada, it’s less than 100.
Nearly 80% of airline seats in the US and Canada is supplied by just seven airlines; in Europe, it takes some 28 airlines to supply the same number, according to according to the International Air Transport Association (IATA).
European Union’s game change initiative — the creation of an Internal Market for Aviation in 1992 — virtually revolutionised travel in Europe, resulting in more capacity, better connectivity and lower fares.
The growth of airlines in Europe, mainly budget carriers, came on the back of deregulation and an explosion of route networks.
For the first time ever, European airlines could fly in and out of any airport they wished and charge customers any price they wanted.
Intra-European air travel has tripled since then, with over a billion passengers marching down jet bridges in 2017 alone.
Air travel now accounts for 3.3% of all EU employment and 4.1% of the bloc’s entire GDP, according to the Air Transport Action Group (ATAG).
Despite the soaring success of low-cost aviation in Europe over the past two decades, ominous clouds have recently started to gather.
In Europe’s competitive landscape in particular, it is said to be a case of the bigger getting bigger and the smaller ones failing.
Analysts say many European low-cost carriers are now anxiously concentrating on their bottom lines in fear of closure of being swallowed by a bigger rival.
And there is significant uncertainty around the way in which Brexit will affect the Europe in particular and global airline industry in general.
Industry experts say the UK’s geographical position in the global airlines network is vital as around 80% of all North Atlantic traffic either pass through the United Kingdom or the Irish-controlled airspace.
Changes to the relationship between the UK and the EU, post-Brexit, could potentially have tremendous implications for all players in this key market.
The global trade body of airlines — IATA, which crunched the numbers of airlines’ planned 2019 capacity — estimated that up to 5mn extra airline seats are at risk of being cancelled if a “no-deal Brexit” occurs.
Potentially, if the UK falls out of the EU without an agreement on security, it could mean passengers and baggage need to be re-screened on flights into the EU from the UK.
Therefore, major stakeholders in the aviation sector continue to call for greater political certainty to enable contingency plans to be developed.
The risk of a no-deal Brexit causing major problems to the aviation industry is ‘high’, IATA noted recently. Fewer Europeans are now visiting the UK and according to tourism agency ‘Visit Britain’; overseas arrivals were down 5.3% last year, while a similar pattern has been observed in the first few months of 2019.
European carriers are expected to report a $7.4bn net profit in 2019 (down slightly from $7.5bn in 2018), according to IATA.
The expected net profit per passenger of $6.40 (3.4% net margin) is roughly a third of the net profit per passenger expected to be generated by North American carriers.
This is because intense competition is keeping yields low even as the regulatory costs remain high.
Although the region has recovered from the terrorist attacks of 2016, IATA noted that in 2018, Europe suffered additional costs of $2bn due to a 61% increase in delay minutes caused by air traffic control deficiencies.
Looking to 2019, high levels of hedging in Europe will mean that the positive impact of lower oil prices will be delayed, IATA said.
By Pratap John
© Gulf Times Newspaper 2019