24 May 2008

The (Non American) big get bigger

While the USA Airlines are being pounded with high oil prices and an economy that is in far worse shape than the waning Bush Administration seems to understand, the larger EU
Air France KLM Group reported a consolidated net profit of €748 million ($1.17 billion) for the fiscal year ended March 31, a 16% decline from the €891 million earned in the prior year as it booked a €530 million provision to cover possible penalties arising from the ongoing antitrust probe into airline cargo activities. Net profit also benefited by €284 million in disposal gains. Excluding the exceptional items, earnings rose 10.8% to €987 million. Revenue was ahead 5.8% to €24.1 billion and operating costs climbed.
German national airline Lufthansa has revealed a huge increase in profits over 2007, reaping the benefits of a successful takeover and increasing popularity of its flight routes.Net profit for 2007 was claimed to have doubled on the previous year. Combined group traffic surged 30 per cent in January from a year previously, with collective passenger demand for European, American, Middle Eastern and African destinations growing fast. A group total of 62.9 million passengers were handled over the year.
British Airways has reported a 45% rise in annual profits but warned that economic uncertainty and high fuel costs pose challenges. BA made a profit of £883m in the year to 31 March, which BA boss Willie Walsh called an "outstanding" result.
Correspondingly the US airlines all reported significant losses for the quarter and will now face annual losses for the period.
So I am a simple guy. If these guys can make profit why not the US airlines? Do the Europeans have a secret ingredient in the water that doesn’t work in the New World?
I believe that there is a collective set of issues that means that rationally speaking the US airlines need to rethink their business models and take a long hard look at their approach to the market. Fixing the current broken US airline model is obviously no trivial task. However the ability to hold onto margins through such tools as Fuel Surcharges, is both a better extrernal way to handle the current oil crisis and a more honest approach to the market. The unbundling approach and using ancillary revenues to prop up the broken US airline business model is a sure fire way to piss of your customers and indeed assure your brand is devalued. Sadly the approach taken (because of the “fear” of transparency to the customer community ) of failing to raise core prices to accommodate the increase in oil or to split out oil based increases through a fuel surcharge is now soundly demonstrated as a failed strategy. For this the US airlines have only themselves to blame for their predicament.
How can we have any sympathy for this behavior? At the very time that the US airlines should have the consumers (that’s everybody) on their side as victims, they are being reviled by their loyal and unloyal customers alike.

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