Globally, 2012 has been a hard year for airlines. Profits decreased to half in comparison to last year; IATA estimates revenues to close at just $4.1Billion by year-end. High average oil prices at above $100/barrel and unexpected events - such as Sandy that caused airlines losses of around $100Million - caused profit margins to fall to 1.6% and strongly buffeted the airlines industry.

"Struggling with the economic and financial crisis, European carriers are expected to be the worst performers generating total losses of around $1Billion," cautions Frost & Sullivan Consultant Lida Mantzavinou. A number of airlines went bankrupt in 2012, such as Spanair and Malev, while big airline groups implemented major restructuring and cost reduction programmes in the beginning of the year to survive in the long term. IAG, Lufthansa and Air France/KLM are aiming to reduce staff by 13,000 within 2014, generate savings - €450Million for IAG and €200Million for Lufthansa - and reduce net debt - €4Billion for Air France/KLM - by 2015. At the same time, they are leveraging on their low cost subsidiaries, Iberia Express and potentially Vueling for IAG, Germanwings for Lufthansa and Transavia for Air France/KLM, in order to face strong competition coming from the low cost carriers.

"The current air transport environment in Europe has been benefiting low cost airlines," notes Ms Mantzavinou. "A combination of factors - increasingly price sensitive business and leisure passengers, national carriers going bankrupt, legacy carriers significantly cutting down capacity to decrease losses and charter carriers reducing their fleet size - have allowed low cost carriers to grow and be the only segment able to offset oil prices and generate profits. Easyjet is expecting to generate 255Million as profit after tax by year end while Ryanair estimates 394Million-418Million. Their success hinges on low cost operation processes that are in place and allow for the lowest unit cost in the market," she adds.

"Looking at low cost carriers piling up cash and bidding for legacy carriers, as in the case of Ryanair and Aer Lingus, it is clear that the rules of the game have changed," says Ms Mantzavinou. "However, constraints imposed by regulatory authorities due to competition rules and additional charges imposed by the ETS on the short haul routes versus the postponement of the scheme on the long haul routes, are restraining the fast growth of low cost carriers. We expect more consolidation to take place in the next years and competition in the short haul market to intensify once airline groups see benefits by 2014 from their restructuring programs."

Source: bne