Fitch Ratings expects 2012 to be a year of significant retrenchment for the largest European airlines, as a poor demand environment and persistent cost pressures threaten to drive operating losses higher.
This month’s roll out of a major cost and capacity restructuring plan by Air France-KLM may signal broader industry rationalization later in the year, particularly for carriers facing bloated cost structures and heavy exposure to quickly softening short-haul air travel demand across Europe.
Despite slowing global economic growth, energy cost pressure is not abating, with Brent crude prices remaining near $110 per barrel and jet fuel costs for European carriers still substantially higher than a year ago. Persistent fuel cost pressure in 2012 will continue to erode the profitability of short-haul flights where unit fuel costs are significantly higher. As a group, European airlines will likely pay nearly 30% of total operating expenses for jet fuel in 2012.
Unlike the U.S., where industry consolidation and a multiyear restructuring wave has kept a lid on fleet and capacity expansion, the European industry still faces a difficult adjustment period as fleet capex is curtailed, unprofitable routes are abandoned, and employment levels are reduced in response to the more difficult operating environment.
The AEA’s December forecast of €1 billion to €2 billion in industry operating losses for 2012 may ultimately be tested as traffic and yields come under increasing pressure.
Against a back drop of macroeconomic weakness and unrelenting fuel cost pressure, Fitch expects European network carriers to remain focused on free cash flow improvement and liquidity preservation this year, with growth clearly taking a back seat.
Excerpted from European Airline Cuts Reflect Tough Demand, Cost Outlook