Scandinavian earnings slashed by fuel, rising competition

The primary reason for the significant fall in earnings was the rapid rise in jet fuel prices, while unit earnings fell as a result of further intensification of competition, according to the airline.

Finnair reported a sharp 40.9% fall in net profit in the same period, due mainly to higher fuel prices. The carrier’s Asian growth strategy has insulated it somewhat from the challenges its Scandinavian counterparts are experiencing, but it is not immune to the increase in competition within Europe.

Norwegian Air Shuttle reported a significant widening in its first quarter net loss from USD1.7 million last year to USD41.2 million in 2008, as yield plummeted 15.9% year-on-year and unit costs rose 7.1% - a lethal combination. The result was affected by fast rising international capacity and costs associated with the integration and expansion of Norwegian.se (FlyNordic). Revenues rose 47.5% in the period, but costs soared 77.7%.

Danish LCC, Sterling, is yet to report its first quarter earnings, but a reduction in losses in 2007 could prove short-lived as fuel prices surge. The airline’s average ticket prices fell 5.2% in 2007 and could fall further this year as competition intensifies. Overall, Sterling has a long way to go before the airline’s performance returns to the levels prior to the Maersk acquisition.

The overall outlook is for further pain in Scandinavia as the region’s economy slows. The region’s LCCs are expanding aggressively in an attempt to gain market share from the larger full service airlines, which is placing yields under pressure at a time of very high fuel prices.

SAS stated there is “certain overcapacity in the market and tendencies toward a decline in business travel”. Finnair stated the outlook for demand is expected to “continue to be moderate in the early part of the year”, while passenger load factors are expected to be slightly lower than last year's figures. Growth in European traffic overall is expected to slow according to Finnair, due to efforts by the major airlines to increase average fares to help offset fuel cost increases.

Norwegian expects continued pressure on yields in 2008, in an environment of “uncertain economic conditions and intense competition”, while Sterling is seeing initial signs of overcapacity on some routes and in some markets, which is placing further pressure on yield.

In its financial commentary, SAS noted how companies in the local market have “adjusted their forecasts downward at the same time as carriers in the US and Asia have filed for bankruptcy”, while consolidation in the industry on a global scale is “continuing with full force”. Perhaps SAS is seeing a similar outcome in Scandinavia in the months ahead.