John Whelan: The aviation sector soars again but so do airline costs
€360m But What A Ryanair Profits Exemplifies 46% Group Year Latest The In Its To Done Three By Declined Industry Be Pa Picture: Ryanair Financial During Can First Of Petitive Months
As air travel soars again — the industry is forecasting a record five billion travellers globally this year — the big question for airline executives is how to turn the passenger growth into bottom-line profits.
A smorgasbord of operating problems has hit airlines, from strikes and rising labour costs to higher-for-longer interest rates, sky-high lease rates, and increased regulatory costs, all combining to take the shine off potential net profits.
Passenger numbers came roaring back to pre-pandemic levels in the January-to-March quarter, rising by 7% at Aer Lingus and by 10% at Ryanair. But the passenger growth came at a cost, and profit margins fell.
At the annual general meeting of the International Air Transport Association (IATA) in Dubai last month airlines reported revenue growth in the first quarter, but profit margins were wafer thin, at 2.7%.
Aer Lingus reported an operating loss of €82m for the first quarter, despite the growth in passenger numbers, following on from a good 2023, which had reported operating profits of €225m.
The Aer Lingus pilots’ strike will have dented anticipated growth in passenger numbers, hitting the airline’s summer season (it had started operating its biggest-ever North American network, including the commencement of new services from Dublin to Minneapolis and Colorado). But the cost base has also gone up because of the pilots' acceptance of the new pay deal.
This is likely to be the start, as the pilot’s deal will likely trigger pay demands from other sectors of Aer Lingus staff and make it difficult for the airline to achieve a profit for the year.
In the IATA forecast for the industry across the rest of 2024, Willie Walsh, IATA’s director general, stated that a net profit margin of 2.7% is far below what investors in almost any other industry would accept. Of course, many airlines are doing better than that average, and many are struggling, he added, despite what the pilots may think.
Activities at International Consolidated Airlines Group (IAG), the Aer Lingus parent company, familiar to Willie Walsh, released their first-quarter 2024 results earlier in the month, showing an operational profit before exceptional items of just €68m on a revenue of €6.4bn, a mere 1% net profit.
The Lufthansa Group, the second-largest in Europe, advised that revenue growth in 2024 would be offset by ongoing cost inflation caused by various strikes, both by employees within the group and by the employees of system partners, with a loss of €849m in the first quarter, probably leading to a year-on-year decline in earnings.
Ryanair has exemplified what can be done to achieve an acceptable margin, operating in a notoriously cyclical and ferociously competitive industry, and growing to become the largest airline in Europe.
Ryanair achieved a profit of €360m despite a 46% fall in profits in the first quarter
Ryanair achieved a profit of €360m despite a 46% fall in profits in the first quarter of the year. However, achieving prior years’ operating profits of 19% to 22% looks highly unlikely in the current climate.
The key to Ryanair's success has been continuous high passenger volumes and tight operating-cost control. This is why the proposed cap on passenger numbers through Dublin Airport is such a critical issue for Ryanair and also for Aer Lingus. Filling all the seats in each aircraft is vital and so is maximum space at airports to handle the summer season, with its high volume of passengers.
With passenger-ticket costs fairly static over the past decade, and operating costs continuously rising, net margin per passenger carried has been held at an average of €5 or $6.
With this prospect of higher costs, a recovery in the business travel market, which is expected to reach as record high in 2024, has been warmly welcomed by all airlines.
The end of the pandemic days of Zoom-only meetings is the main driver. But the final outcome across 2024 for the industry remains subject to avoiding adverse developments, especially any escalation in conflicts in Ukraine and the Middle East, or capacity restrictions at airports.