Europe's airline industry faces up to economic slowdown

Airlines: Gloomy outlook

August 8, 2001: 9:52 a.m. ET

European airline industry faces up to slowdown; budget carriers cash in
CNN's Abid Ali

LONDON (CNN) - The writing is in the skies for Europe's airline industry as a world economic slowdown frightens off business passengers and profits tumble.



	We are beginning to see the inevitable effect of a serious slowdown in U.S. growth washing over to Europe.



	Chris Avery Airlines Analyst JP Morgan

British Airways (BAY) said on Monday its quarterly profit halved as businesses cut back on travel. A day later Deutsche Lufthansa, Europe's biggest carrier, said it would fly smaller aircraft as demand declines.

Lufthansa's (FLHA) move effectively will withdraw capacity equivalent to two Boeing 747-200 jumbo jets, which can carry up to 452 passengers each.

BA began cutting back capacity two years ago. KLM, the Dutch carrier, said on Tuesday it would axe an unspecified number of jobs, as it tries to beat down rising labour and fuel costs.

"We have already had a sequence of downgrades from British Airways, Lufthansa has reduced its guidance once, and KLM has massively reduced its guidance," Chris Avery, airline industry analyst at JP Morgan, told CNN.

"We are beginning to see the inevitable effect of a serious slowdown in U.S. growth washing over to Europe."

Ryanair scoops up rivals' passengers
By contrast, BA's and Lufthansa's woes and an economic slowdown have proved a boon for Ryanair, the Dublin-based low-cost carrier, which is poaching prized business passengers from BA and Lufthansa on European routes.

High margin corporate travel, which accounts for up to two-thirds of airline industry revenue, has been particularly hard hit as struggling companies scramble to cut costs.

"While BA has increased prices by 13 percent this year we have continued to cut fares," Michael O'Leary, the flamboyant chief executive of Ryanair, told CNN. He said his higher-cost rivals "are really hurting customers during the economic slowdown."

Ryanair, Europe's biggest budget airline, said on Wednesday first-quarter profit after tax rose 28 percent to

23.2 million, as passenger traffic soared 42 percent to 2.4 million.

The Irish carrier, which models itself on U.S. low-cost carrier Southwest Airlines (LUV: Research, Estimates), has been a constant thorn in the side of European airlines, undercutting prices by flying to secondary airports and sell more than 90 percent of its tickets through its website.

The airline sells seats on flights from Dublin to Edinburgh for as little as £1.

Ryanair clearly feels bold enough in the current economic slowdown. It told Boeing (BA: Research, Estimates), the world's biggest passenger aircraft maker, it would not buy five new 737-800 aircraft and plans to cancel an order for another 12 options unless Boeing adjusted their pricing so that it "begins to reflect the current market realities."

"I think Boeing would be reticent to change its entire pricing structure for a single customer," Avery said. "And one that isn't even material against the likes of American, Delta, Continental and SouthWest, who are of course Boeing's key customers. But I think that if all the customers turn around and complain about pricing escalation then I think Boeing would have to listen."

Airbus turns more cautious
Airbus, Boeing's only rival, has lowered its forecast of plane deliveries in 2003 to 400 from 450 amid a rapidly weakening airliner market.

The Toulouse-based group also said that it was discussing delivery delays with a number of airlines, but still expects to meet its target of receiving 100 firm orders for its superjumbo. The double-deck A380, which will be able to carry up 550 passengers, was planned as Airbus's weapon with which it could to break Boeing's stranglehold on the market for very big jets.

BA is desperate to conclude a joint venture for operating on North Atlantic routes with oneworld partner American Airlines. The airlines are proposing to share profits on nine routes across the Atlantic, and have sought approval for the deal from regulators in Brussels, London and Washington.

"We do not believe that alliance will get regulatory approval at a price acceptable to both parties," Nick Anderson, analyst at Lehman Brothers, wrote in a note to investors. The company is advising clients to sell BA stock, which it said it values at 190 pence a share. The stock was trading at 331.5 pence at midday on Wednesday.

Any regulatory approval would mean BA giving up more than 100 takeoff and landing slots at Heathrow Airport, BA's main hub and Europe's busiest airport. When BA and American first announced plans for a joint venture, BA was unwilling to meet regulators demands to release up to 300 slots at Heathrow. The alliance was effectively blocked.

A changed landscape?
BA Chief Executive Rod Eddington and his counterpart at American Don Carty believe the industry landscape has now changed since they first floated plans to combine their Atlantic routes. The Star Alliance, led by Lufthansa and UAL Corp's United Airlines, now controls about 27 percent of slots at Heathrow.

BA is switching to smaller jets with fewer economy-class seats and more room for high-paying business travelers, but it reported a fall of more than 11 percent in business traffic in July.

Lehman's Anderson said BA "currently derives 37 percent of its revenue from routes to the Americas (which provided) an average of 64 percent of group EBIT (earnings before interest and tax) over the last 10 years."

Any move to trim its takeoff and landing slots for flights to the U.S. would therefore pose a big threat to profits. And experts predict that if the U.S. and UK conclude an "open-skies" agreement, allowing an expansion in the number of competitors, average business fares could fall by at least 20 percent. Currently, business class fares to the U.S. from Britain are 85 percent higher than those from France or Germany, according to the latest American Express travel survey.