The volatility and uncertainty of the aviation industry were in evidence on Thursday with the release of 2017 results for two of Europe’s most well-known airlines, Lufthansa and Virgin Atlantic. Deutsche Lufthansa AG, the parent company of the German airline, reported a record 70 percent increase in earnings before interest and taxes (EBIT) to €2.97 billion (US$3.68 billion) with the airlines in the group contributing the following: Lufthansa €1.63 billion (US$2billion); Swiss €542m US$667m); and Austrian €94m (US$115m).
The news was not so good for Virgin Atlantic with the UK carrier reporting a pre-tax loss of £28.4m (US$39.6m).
Lufthansa Group’s result is particularly impressive given it comes in a year that saw the demise of Air Berlin and associated costs, and in an environment of increasing fuel costs. Speaking in an official statement Carsten Spohr, Chairman of the Executive Board and CEO of Deutsche Lufthansa AG said, “Our endeavors of the past few years are paying off. Our modernization has a sustainable impact. We have achieved the best result in the history of our company. 2017 was a very good year for our customers, our employees and our shareholders.”
Of benefit to the group was a reduction in unit cost by 1.8 percent and the negotiation of a collective agreement with the pilots of Lufthansa, Lufthansa Cargo, and Germanwings, which gave a positive one-off effect of €582m US$716m).
For Virgin Atlantic its first loss in four years was attributed by its Chief Executive Craig Kreeger in the Financial Times to a triumvirate of factors: ‘A weak sterling relative to the dollar, which impacted demand from UK travellers flying to the US; problems with the Trent 1000 engines (on the 787 aircraft) as well as Hurricane disruption in the Caribbean and the US.’
This resulted in a drop in the number of passengers carried in 2017 to 5.3 million, down from 5.4 million in 2016.
This comes as a blow to Virgin Atlantic given that in 2014, after racking up total pre-tax losses of more than £300m in the five years to the end of 2013, it returned to profitability after Delta took a 49 percent stake in the company.
Announcing the 2014 results in March 2015, the Financial Times reported the company touting that by 2018, they would surpass the record pre-tax profit of £99m recorded in 1999 on the back of a strong transatlantic strategy. However, in the intervening years, the transatlantic market, in particular, has seen fierce competition brought about by upstart low-cost long-haul operators such as Norwegian Air and Canada’s WestJet entering the fiercely competitive market.
Perhaps to counter this threat to their traditional market Virgin Atlantic announced Thursday that they would increase flights to Johannesburg to a double daily service.
While Virgin Atlantic is facing a tough time it also has a change of ownership on the horizon with Air France-KLM expected to finalize its 31 percent share of the airline in spring 2019. Lufthansa is also giving a measured outlook for 2018 with the Germans advising of delays in the delivery of new A320neo aircraft due to issues with Pratt & Whitney engines.
This has resulted in the scaling back of the 12 percent capacity increase for 2018 announced in January down to 9.5 percent. An increase in fuel costs of €700m (US$861m) has also been forecast but the group expects operating costs excluding fuel and currency exchange to offset this by reducing between one to two percent.
The other factor which neither Lufthansa Group nor Virgin Atlantic have referenced in Thursday’s results are the potential effects of Brexit on the operation of European carriers. With the official date of the UK leaving the European Union only one year away, questions are still to be answered on what the future regulatory aspects of the European aviation landscape will be and how these may impact the outlook for 2018 and beyond.
John is educated to postgraduate level achieving a masters degree with Distinction in Airline and Airport Management and has recently led an undergraduate Aviation Management course for 450 students at a leading London university. John is currently an external instructor for IATA (International Air Transport Association) and a member of the Heathrow Community Fund’s ‘Communities for Tomorrow’ panel.
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