Turbulence Alert for Europe's Big Carriers

After years of smooth flying, Air France-KLM, Lufthansa and BA face sliding revenues and stronger competition, Morgan Stanley warns

Could the good times be winding down for Europe's three biggest airlines? Shares in Air France-KLM, British Airways, and Lufthansa slumped on Sept. 12, on analyst forecasts that revenue and earnings growth could slow next year.

Air France-KLM (AKH) dropped as much as 3.1%, Lufthansa (LHAG.F) sank 3.89% and British Airways (BAY.L) fell 1.5% after Morgan Stanley (MS) analysts downgraded the stocks in light of flattening revenue growth and heightened competition on long-haul routes. "Without respite from high fuel costs, or an unprecedented cut in labor expenses, we believe the trio of European network carriers will be 'running to stand still' through the end of the decade," the analysts' report says.

The big three carriers have flourished by taking advantage of robust passenger-traffic growth across Europe, while trimming costs and focusing on higher-margin long-haul routes. That has left smaller competitors (BusinessWeek, 08/14/07) and low-cost carriers to fight for less-profitable intra-European business.

Revenue Per Passenger Decline

In the quarter ended June 30 Air France-KLM's net income was up 70% year-on-year, to $575 million, on revenues up 2.5% to $8.25 billion. Lufthansa posted quarterly earnings up 64%, to $595 million, on revenues of $7.4 billion, while BA's earnings rose 74.7%, to $545 million, on revenues of $4.45 billion. All three carriers have issued upbeat full-year forecasts.

But Morgan Stanley analysts warn that passenger yields—that is, revenues per passenger—are growing more slowly than in past years, and are likely to decline at all three carriers over the next four years. At the same time, the European carriers face increased competition from the likes of Singapore Airlines (SIAL.SI) and influential (BusinessWeek, 03/16/06) Dubai-based Emirates, which are buying more long-haul planes such as Airbus A380 superjumbos and expanding service to Europe.

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