Profitability at European airlines is likely to plunge following the US terror attacks, with many carriers facing losses and some possible bankruptcy as demand falls, fuel prices spike and a world recession looms, analysts said Friday, September 14.
Of the major carriers, British Airways will likely be hardest hit, due to its heavy exposure to the North American market — where the added burden of tighter FAA security regulations will likely affect scheduling and increase carriers' costs — while Germany's Lufthansa and Air France may survive the downturn in slightly better shape, they added.
But only short-haul, low-fare airlines have good chance of remaining profitable in the short to medium term. In Paris, an airline analyst said: "When you look at Europe there are four main airlines, BA, Lufthansa, KLM Royal Dutch Airlines and Air France. Out of all of them Air France has the least exposure to transatlantic routes.
"BA earns something like 40 percent of its income from flights to North America, while KLM relies heavily on transatlantic flights coming into Schipol (airport)." She said that as result Air France's share price has held up this week when others in the sector have dropped.
"But these guys, including Air France, are going to get whacked. We've already downgraded our full-year operating forecast for BA from a positive operating figure to negative. These businesses are highly operationally geared ... In bad times they've still got to cover heavy fixed costs," the analyst said. "It's going to be bad for a very long time. Some airlines could be facing bankruptcy," she added, declining to say which airlines carry the heaviest bankruptcy risk.
In Frankfurt, Schroeder Salomon Smith Barney said the three key negative impacts on European airlines will be reduced demand for air travel — possibly by as much as 20 percent initially — sustained high jet fuel prices and the heightened prospects of a global recession.
Comparing the situation now with the Gulf War period, SSSB said that, at that time "European airlines suffered an initial 23-percent drop in traffic in the first quarter, followed by six-percent year-on-year declines in the following three quarters."
Among the major airlines it identified as its top pick was Lufthansa, due to its relatively strong balance sheet, more diverse and less cyclical business and fuel hedge. But it added that "we expect all major European airlines to report net losses for the current fiscal year and most likely extending into next year as well. Only short-haul, low-fares airlines are likely to remain profitable through the current situation."
Some German banks said they have downgraded Lufthansa as a result of the attacks. Lufthansa's revenues from passenger traffic make up 70 percent of group revenues, with 20 percent of that coming from flights to North America, company spokeswoman Christina Ritz said. "The latest events certainly would have an impact on our business but ... we can't give you figures. There are a lot of unknown factors," Ritz said.
In London, analysts also compared current events with 1991, a year that combined the threat of terrorism that accompanied the Gulf War and a US recession, dealing a massive blow to the industry's growth trend.
They said Tuesday's terrorist attacks on US soil will likely have a similar or worse result. Inevitably demand will be hit by a perception that there may be further plane hijacks — and this at a time when the industry was already heading for a cyclical recession.
JP Morgan analyst Chris Avery said he anticipates that international airline load factors will fall sharply, adding to existing problems of weak industry conditions and resulting in further cost and capacity reductions.
Avery argued that BA — which is already cutting capacity significantly and recently announced 1,800 job cuts — will not be immune to this process, since plans and strategies that were valid last week are now much too optimistic.
Virgin Atlantic, meanwhile, which operates 16 daily flights to the US accounting for two thirds of its revenues, admitted the situation is "challenging", but has denied it will face a cash crisis. — (AFP, Frankfurt)
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
