How Much Did European Airlines Lose In The First Quarter?
As the domestic situation in China gradually eases, the pandemic situation continues to ravage the world outside of China, the United States and Europe are still the centre of the global pandemic. In Europe, Italy, Spain, and Germany have just passed the peak of the pandemic, but the situation of the British pandemic has not yet slowed down. It has become the first country in Europe with more than 30,000 deaths. The suspension of the European aviation industry caused by the pandemic continues, and airlines of various countries are still in dire straits.
European airlines suffered severe losses in the first quarter
Last week, European airlines released their first-quarter financial reports. We selected the biggest three European full-service airline groups as representatives, combined with the quarterly report data released by the airline and related media reports, and compared them with the first quarter data of 2019 to see how hard it is for the major European airlines in the first quarter.
The first quarter is traditionally the off-peak-season for European and American airlines. Most European airlines also had negative operating profits in the first quarter of 2019. Europe’s largest aviation group, Lufthansa Group, had an operating loss of 336 million euros in the first quarter of last year; AF & KLM, which consisted of Air France and KLM, had an operating loss of 286 million euros in the first quarter of last year. British Airways’ parent company, IAG Group, had an operating profit of 135 million euros in the first quarter of 2019, the only profitable one among the three major aviation groups.
In 2020, under the impact of the pandemic, it is not difficult to foresee a large operating loss in the first quarter of European airlines. From the end of February, the pandemic began to spread rapidly in Europe. In less than a month, the European aviation market fell directly into the “freezing point” from the off-season.
According to media reports, the Lufthansa Group lost 1.2 billion euros (about 1.3 billion US dollars) in the first quarter of 2020, which is the adjusted EBIT loss, (Adjusted EBIT Loss, note: Lufthansa Group’s operating profit and loss was calculated as Operating Result before 2013, and it was called Adjusted EBIT Profit / Loss since 2014) which is four times the 2019 loss. The adjusted profit before interest and tax in Lufthansa’s 2019 financial report was 2 billion euros, which means that Lufthansa lost 60% of its operating profit for the entire year in the first quarter. Carsten Spohr, CEO of Lufthansa Group, described the operation in the first quarter of this year: “At the moment, we are only flying about 3,000 passengers a day. In terms of flight schedule, our company has gone back in time to where it started in 1955 – a decade after the Second World War and following a 10-year ban on flights. In less than 65 days, we have returned to the flight plan levels of 65 years ago. That is extremely bitter, devastating and painful.“ The Lufthansa Group’s quarterly report for the first quarter of 2020 was originally scheduled to be released on April 30 but was later postponed due to the impact of the pandemic until the second half of May, so the details of the loss are not yet known.
In the first quarter of this year, Air France & KLM’s operating losses (Income from current operations) amounted to 815 million euros, nearly three times the operating losses in the first quarter of 2019. Due to the increased risk of international pandemics and the introduction of travel restrictions, Air France and KLM, which has a large number of international routes, significantly reduced its capacity in the latter quarter of the first quarter, and revenue in the first quarter fell by 15.5% year-on-year. In addition to the main business loss of 815 million euros, the Air France KLM Group’s loss in the first quarter of 2020 also included 46 million euros caused by fleet adjustments, aviation fuel-hedging losses of 455 million euros, deferred income tax of 173 million euros, and exchange rate losses of 148 million euros, financial expenses of 164 million euros. Eventually, the Air France-KLM 2020 first-quarter net loss (Net income for the period) amounted to 1.8 billion euros. The drop in oil prices caused by the “crude oil price war” that began in March had a greater impact on Air France and KLM. Due to the decline in demand, Air France and KLM were forced to cancel a large number of jet fuel hedging contracts to cope with the low consumption of jet fuel in the future, resulting in huge jet fuel hedging losses.
IAG Group’s operating loss in the first quarter of 2020 was 535 million euros. IAG Group CEO Willie Walsh said that before the end of February, the group’s business development trend is good, but since March due to the impact of the government’s border restrictions, most losses occurred in the second half of March. In addition to operating losses, the IAG Group also experienced huge jet fuel and exchange rate hedging losses in the first quarter, as high as 1.325 billion euros, in addition to 22 million euros in non-operating losses. IAG Group’s net loss before tax for the period in the first quarter of 2020 (Loss before tax for the period) reached 1.882 billion euros.
The first quarter has been very bleak, but for the European aviation industry, “the second quarter will be worse” (Lufthansa Group CEO Carsten Spohr said pessimistically in his speech).
Halfway through the second quarter, but the fight for survival still isn’t over
The aviation industry shut down caused by the development of the pandemic will continue. Whether they can survive the long winter in the second quarter will determine the survival of airlines around the world.
As we all know, the operating costs of airlines are divided into fixed costs and variable costs. Even if the airlines ground a large number of flights without variable costs, the fixed costs still need to be paid, including aircraft leases, runway and stataion expenses, and MRO, employee salaries, ticket refunds, administrative expenses, etc. The level of operating profit and loss reflects the severity of the impact of airline operations caused by the pandemic.
So, how is the viability of European airlines?
We use the loss of each aircraft of each airline company as the evaluation basis in the first quarter, and compare the company management capabilities and cost control capabilities of each airline company. It can be seen that the operating losses per aircraft of the Lufthansa Group and the KLM Group are relatively large, at 1.6 million euros and 1.5 million euros respectively; while the IAG Group’s operating losses per aircraft are 900,000 euros.
The large single-unit loss means higher operating costs, It also means that airlines face greater risks during this special period of the pandemic.
European representative airlines ’ratio of operating losses in the first quarter of 2020 to the total number of aircraft of the group (unit: millions of euros)
In the predicament, European airlines are trying to live in this “survival race”, while airlines with high management level and strong cost control ability are easier to survive, and those with poor management ability and higher costs, if they want to successfully overcome this difficulty, then more external assistance are needed, or an urgent deeper cost reform.
Lufthansa Group has requested assistance from the governments of Germany, Austria, Belgium, and Switzerland. After close communication, it has been confirmed that the German government will provide 9 billion euros in relief aid. As a condition, the government will acquire a 25% stake in Lufthansa, but it will not participate in company management. The Swiss government has also agreed to provide 1.5 billion Swiss francs (1.52 billion U.S. dollars) in loans to Lufthansa subsidiaries Swiss and Edelweiss. If Lufthansa Group can get the loan as early as possible, Lufthansa can escape the fate of the likes of Virgin Australia. Lufthansa expects that the flight volume will be effectively restored in June, however, they are not optimistic about the market expectations in the next 2-3 years. In the follow-up, Lufthansa will reduce the size of the company, lay off 10,000 of its 130,000 employees, and reduce the fleet size of more than 760 aircraft to about 660. Earlier, Lufthansa had closed its low-cost carrier, Germanwings, and retired several aircraft in advance.
Air France KLM Group
Air France & KLM has suffered severe losses due to declining demand and jet fuel hedging in the first quarter, but with capacity cut reduced by 95% year-on-year, the second quarter will be the most difficult stage. Since the impact of the pandemic, Air France and KLM have vigorously reduced costs by reducing group building expenditures and salary cuts. In the second quarter, it is expected to save 350 million euros per month. As of March 31, Air France and KLM raised liquidity (Liquidity position) amounts to 6.4 billion euros through revolving credit facilities, aircraft mortgage financing, and sales of Sabre shares. These funds can support Air France and KLM operations til the third quarter. Since Air France and KLM have the support of the French and Dutch governments as shareholders, their survival seems to be guaranteed to a certain extent.
Air France and KLM has received good news recently as the rescue promised by the French and Dutch governments finally has a more clear path: The French government announced that it will provide 7 billion euros in aid loans to Air France, of which 4 billion euros will be guaranteed by the French government and will be issued by a consortium of 6 French banks and other international banks. With a term of 12 months, Air France and KLM have the right to extend the loan by a year twice; Another part of the 3 billion euros will be provided by government-managed funds for a period of 4 years. The bailout condition from the French government is that Air France needs to develop into a global environmentally friendly airline with the lowest carbon emissions. Ben Smith, CEO of the Air France Group, thanked the French government in an interview, “the loans will allow Air France-KLM to get through the most difficult period of the next few months, during which our liquidity risked reaching a critical level, and to continue operating for 12 to 18 months, based on assumptions of the reopening of the market.” In response, Ben Smith promised to halve carbon dioxide emissions by 2024.
The Dutch government’s loan plan is also being developed, and promises that the loan amount will be between 2 billion and 4 billion euros. At the same time, the Dutch government has also put forward some conditions for the loan, including the suspension of shareholder dividends and bonuses, and reduction of executive salaries . For assistance from the Dutch government, Ben Smith said that the Dutch government should provide assistance in proportion to the size of Air France and KLM.
Since the pandemic, the IAG Group, which has been profitable for seven consecutive years, has also suffered a great deal. During this period, the IAG Group raised liquidity through methods such as shutdowns, salary reductions, and extension of the revolving credit limit period. Although it has been said that it does not seek special loans other than general loans, IAG Group still seems to be experiencing difficulties in temporary capital turnover. In early April, the IAG Group submitted a loan application to the British government. It has obtained a loan of 300 million pounds from the British government. This loan assistance belongs to the British government’s “Coronavirus Corporate Financing Facility (CCFF)”, which aims to implement emergency assistance by providing short-term bridge loans for large companies from one week to one year. For the IAG Group, this is the second government bailout received-last week, IAG Group’s Iberia and Vueling received 750 million euros and 260 million euros respectively of government-backed loans. According to reports, the IAG Group has 10 billion euros of liquidity at the end of April, which has surpassed most of its competitors and will become an important guarantee for the IAG Group to successfully overcome difficulties.
At the same time, IAG CEO Willie Walsh also said that the IAG Group needs to “reshuffle” to meet the challenges of future uncertainty. One of the measures to “reshuffle” is that British Airways will lay off 30% of its staff, involving about 12,000 employees. In addition, British Airways grounded all routes at London Gatwick Airport in early April, and recently said that after the outbreak, British Airways may not resume Gatwick Airport routes, giving up its base position in London’s second largest airport. British Airways Chief Executive Officer Alex Cruz wrote in a letter to employees: “As airlines, like other industries, we will face the new normal in the future, with” unusual “as usual.”
In addition to the three major full-service airline groups, low-cost airlines in Europe are also striving for survival.
In April, Ryanair operated only 600 flights, compared with originally planned 76,000 scheduled flights. Throughout the second quarter, Ryanair is expected to be operating at the same level similar to April. The number of flights performed will be only 1% of the original plan, and the number of passengers is expected to be less than 150,000, only 0.5% of the original plan. Ryanair disclosed to the media in March that it has 4 billion euros in cash and equivalents and can support 18 months in a state of suspension. In its latest market outlook released recently, Ryanair once again stated that it does not need government’s targeted assistance. Although Ryanair did not disclose its latest liquidity amount, Ryanair, which has been profitable for more than ten consecutive years, has higher than average survivability and corporate management. In the early stage of the pandemic, Ryanair quickly took emergency measures, including stopping recruitment, postponing payment, and stopping stock repurchases. Ryanair also believes that the market will be difficult to recover in the short term. In order to cope with the market downturn in the future, it will also reduce the scale of operations, including layoffs of 3,000 people, a 20% salary reduction, and the closure of some European bases. At the same time, Ryanair is negotiating with Boeing to reduce the delivery of Boeing 737 series models in the next 24 months, and is negotiating with its A320 aircraft leaser to reduce the number of future aircraft leases. As of June 2019, Ryan has 87 operating bases, 16,800 employees, and 455 Boeing 737 aircraft, as well as 16 leased Airbus A320 aircraft.
Not only did Ryanair not apply for assistance, it also repeatedly opposed the targeted assistance of governments to airlines by various countries, and believed that all government assistance to airlines is contrary to EU law. For example, the French government only refunds aviation tax to airlines of “French nationality”, but other airlines (including Ryanair) that also serve French routes do not enjoy the benefits of tax refunds. Such a policy violates the EU competition law. At present, the targeted assistance issued by European governments to airline companies has exceeded 30 billion euros. In addition, Ryanair also believes that the recovery of consumer confidence after the pandemic will require a long period of low fare stimulation. If they continue to provide targeted assistance to full-service airlines, the market will be completely distorted after flight operations return to normal, high-cost full-service airlines can still adopt low-cost sales, which is very unfair to the airlines such as Ryanair that have been working to reduce costs and provide passengers with low-cost tickets for 20 years. To this end, Ryanair called on the governments of the EU member states to reduce or exempt passenger taxes, take-off and landing fees for the entire industry, or to provide salary compensation for employees throughout the industry, which would be a better method than targeted assistance to flag carrier airlines.
Since March 30, EasyJet has grounded all aircraft. The full grounding has continued for more than a month. Recently, EasyJet announced that it has raised enough reserve funds to survive a suspension period of up to 9 months. EasyJet carried out scenario analysis of the impact of flight suspension on the pandemic lasting 3 months, 6 months and 9 months respectively. In these three cases, the required financial support is 1.2 billion pounds, 2.2 billion pounds and 3 billion pounds, and designed a plan to reserve funds in three ways: reducing expenditures, delaying aircraft delivery and multi-channel financing. At present, the weekly operating cost of EasyJet has stabilised at 30 million to 40 million pounds (daily, the weekly operating cost is 120 million to 130 million pounds); In addition, in consultation with the aircraft manufacturer, the short- and medium-term delivery plans for a total of 24 aircraft were postponed. As of March 31, EasyJet had cash of £ 1.4 billion. Through multi-channel financing, EasyJet also received a guaranteed retained cash flow (RCF) of £ 400 million, and £ 600 million of the Coronavirus Corporate Financing Facility (CCFF) unsecured loans, 400 million pounds of fixed-term loans, and 400 million to 550 million pounds of sale-and-leaseback (SLB), bringing EasyJet’s nominal liquidity to 3.3 billion pounds.
Johan Lundgren, CEO of EasyJet said, “EasyJet is still looking at other sources of funding and assistance”, and Johan Lundgren is very confident in the unsealed tourism market. We will act immediately when demand recovers. “I do think there will be demand for holiday passengers. I think the lockdowns we have seen in countries mean a lot of people want to go out and have a holiday, though it depends on what restrictions are in the countries.”
When will the European aviation market recover?
For the European aviation industry, there are more airlines struggling to survive, and one of the beliefs that allows them to persevere is that the European market demand in July will be the first major recovery and rebound in the summer peak season, and at present, European countries are also drafting policies for reopening after the pandemic. Therefore, European airlines plan to resume flights gradually in the third quarter. In the third quarter, Ryanair expects flights to return to 50% of the originally planned flights, IAG Group expects to resume 45%, Air France and KLM expects to resume 20%, and Lufthansa has not yet started the recovery plan, however, it has said that it will restore the capacity of 160 aircraft in June (currently 60 in operation).
However, most airlines are soberly aware that the pandemic has triggered an economic recession, and it will take two to three years for the market to fully return to the level before the pandemic. In the future, the prospects for economic development in Europe will be more uncertain, and the risk of recession will increase, which will inevitably affect the long-term demand level of the aviation market. In the context of the economic downturn, the market capacity has shrunk and mergers & acquisition trend has intensified, and the European aviation industry will likely change dramatically. Since 2018, the European aviation industry has Monarch airlines, Thomas Cook Airlines, Flybe and other airlines have gone bankrupt one after another. This indicates that the European aviation industry may have entered another round of mergers and acquisition. The arrival of the pandemic will accelerate the reshuffle and reorganisation of the European aviation industry.
The original article is in Chinese, this version is translated by Albert K. Field