Fasten your seatbelts – there is even more turbulence ahead

As BA reports its first ever summer season loss, the lean winter months look worse than ever for the industry, reports Sarah Arnott
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The Independent Online

If the airlines are suffering this much already, just wait for the lean winter months. British Airways (BA) admitted yesterday that it lost money in the summer season for the first time in its history. Pre-tax losses came in at £124m compared with profits of £37m last year. Revenues dropped 12 per cent to £1.98bn.

BA is not struggling alone. More than 50 airlines have gone bankrupt since the start of last year, pushed over the edge by the irresistible combination of sky-rocketing fuel prices followed by collapsing passenger numbers as recession hit around the world. Willie Walsh, BA's chief executive, has been consistently outspoken about the severity of the situation. Aviation is facing the worst crisis in its history, Mr Walsh says, and BA itself is "fighting for survival". Given such comments, yesterday's results contained few surprises.

The other big European flag carriers are not doing much better. Air France-KLM reported losses of €496m (£424m) earlier in the week, on revenues down 21 per cent. Lufthansa scraped a profit of €40m, down by nearly 90 per cent from last year's €337m, but the German giant's sales were down by 19 per cent. Mr Walsh said: "The comparison reinforces that we have faced up to the challenges in the market sooner than most of our competitors, and have been realistic about both the scale and nature of the situation."

BA is putting together drastic cost-cutting measures. Costs are already down 6.6 per cent – helped by 2,500 job cuts, capacity reductions, and a pay deal with engineers and pilots that the group hopes will soon be replicated with its baggage handlers, check-in desk assistants and cabin crews. The carrier's strong point is that it has lots of cash – around £2bn after last week's successful £300m convertible bond issue. Its major rivals have pursued a similar course. Lufthansa raised €750m at the beginning of the month, and Air France-KLM issued a €575m convertible bond in mid-June. With so much cash, none of the big names is likely to go under.

The budget carriers are also coping, helped by cash-strapped customers trading down to their low fares. Ryanair's results, earlier this week, showed traffic figures up by 11 per cent largely cancelled out by a 13 per cent fall in average fares. But the airline is still predicting a healthy profit this year – even if it is now expecting to come in at the lower end of the €200m to €300m forecast – and it has a €2.5bn cash pile.

But for less-established, regional players, the future is less rosy. The International Air Transport Association (Iata) is predicting global industry losses of $9bn as revenues plummet 15 per cent, and the latest traffic statistics, published this week, show international passenger numbers down by 7.2 per cent in June.

There has already been considerable consolidation – both actual and attempted – in response to the crisis. BA's merger talks with Iberia have been dragging on for months, and a brief flirtation with Qantas was quickly scuppered by international ownership regulations. Lufthansa, meanwhile, has been on a spree. The German flag carrier has picked up Brussels Airlines, upped its stake in BMI and is currently pushing its acquisition of Austrian Airlines through Europe's Competition Commission.

But the winter is when things will get difficult, as cash from the summer season runs out. Gert Zonneveld, a transport analyst at Panmure Gordon, said: "Typically, airlines' cash runs to a low point around January and, given that there are probably a few hundred airlines in Europe alone, and quite a few are struggling, there are plenty more that could go under."

Where the axe will fall is harder to predict. Commentators are watching SAS closely. Lufthansa has been sniffing around the Scandinavian group since last year and is also in discussions about buying out its stake in BMI. Another source of speculation is Aer Lingus, the Irish carrier facing another year of losses and cutting 800 jobs. "Aer Lingus has rejected approaches from Ryanair and no one else has yet stepped in, so they might get into real difficulties depending on how quickly their cash disappears," one City source said.

Notwithstanding the short-term carnage, there could yet be an upside to recession. Iata is calling for out-dated laws designed for state-owned national carriers to be dropped. The crisis is proving its point, says the group. "The economic situation is exposing the structural weakness in the industry," a spokesman said. "If you were another business, you could consolidate in order to better balance the risks. As an airline you are tied to a national market, and if you want to, for example, increase the frequency, you need the government to negotiate a new bilateral treaty."

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