Restructuring Pays Off for Europe’s Largest Airlines
Both Air France-KLM and Deutsche-Lufthansa posted forecast beating earnings on Wednesday surprising stock markets, and analysts have told CNBC that their futures could be bright as years of restructuring seem to be paying off.
"Restructuring cost savings are starting to come through and hence relative to expectations earnings have improved," Stephen Furlong, senior equity analyst at Davy Research told CNBC.com.
"If unit revenue holds up and restructuring cost [savings] take hold then this will manifest itself in bottom line numbers."
Both airlines have been in the process of cutting thousands of jobs to restore profitability to their businesses but Dónal O'Neill, airlines analyst at Capital Markets believes Air France-KLM are further down the road when it comes to cost savings.
"For Lufthansa, it has done a very good job with Austrian and the integration of Germanwings." he told CNBC.com, highlighting the acquisitions that the firm has made.
"However, it has more to do on restructuring and is facing many internal challenges with staff."
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Third-quarter net profit for Air France-KLM rose to 306 million euros, up from 14 million euros in the same period last year. Lufthansa reported a 30 percent year-on-year rise in net profit. Shares of Air France-KLM rose 11 percent in morning trading on Wednesday with Lufthansa shares up 8.4 percent.
"The consolidation and joint ventures around the world are helping," Furlong said, a belief echoed by Douglas McNeil, transport analyst at Charles Stanley Securities.
"Recent mergers have helped to support yields, but as much as anything they've been supported by a remarkable degree of capacity discipline by carriers across the whole continent, whether party to mergers or not," he told CNBC.com.
And it's this capacity discipline — ensuring seats aren't empty — that analysts see as key if these legacy carriers are going to enjoy a successful future as forecasts show that fuel prices are unlikely to rise that much.
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"Fuel costs are very high but if you look at fuel for 2013, Air France KLM for example, are forecasting similar levels to 2012 meaning the airlines are unlikely to have incremental fuel cost increases," Furlong said.
McNeil at Charles Stanley agrees but warns that fuel prices are already at an elevated level.
"It will take the industry as a whole a long time to make up the damage to earnings." he said.
Peter Hyde, leisure and transport analyst at Liberum Research sees European airlines being able to cover these fuel increases but said restructuring needs to take hold before people see a real turnaround in the sector.
"The real issue is that returns are still low, so profit needs to recover more for the industry to become viable," he told CNBC.com.