Fuel: this year's threat January 2006

Europe’s Big Three are producing some pretty satisfactory financial results. The problem is that the impact of last year’s surge in fuel prices has not yet filtered through to the bottom line.

Overall, it looks as if the Big Three will report a cumulative 8%-plus increase in revenues for the 2005/06 financial year, a similar increase in EBITDA and a 13% increase in reported net profit. However, according to Andrew Lobbenberg, the perspicacious ABN–AMRO equity analyst, 2005/06 will probably represent a peak, with operating and net profits deteriorating in 2006/07 (at this early stage, EBITDA is forecast to fall by about 8%).

Air France (including KLM) and Lufthansa appear to have played the oil situation rather cleverly, managing to impose fuel surcharges, especially on long–haul services, in excess of the actual fuel bill increase after taking hedging into account. For Air France, the difference between the increases in fuel charges and fuel costs in 2005/06 is estimated at a positive €218m; for Lufthansa a positive €67m. BA was not able to find quite the same degree of protection, and in its case, fuel cost increases exceeded surcharges by €228m.

This year it looks as if fuel prices will remain high — the early February spot price for crude was US$65. The airlines are partly hedged, Air France most fully at $44 for 61% of requirements, BA is covered at $55 for 50%, and Lufthansa was covered at $54 for 70% in 2005. But at an average of $60 for the full year 2006 or 2006/07, this implies an increase in the fuel costs of Air France of €935m; for BA, an increase of €650m; and for Lufthansa, €723m. The scope for more fuel surcharges is now limited — these can be rationalised when oil prices are shooting up, but it is more difficult to impose new surcharges to compensate for level, albeit high, prices. Assuming surcharges remain at current levels, ABN–AMRO calculates that the additional income from this source in 2006/07 will be €394m at Air France, €134m at BA and €477m at Lufthansa.

Subtracting the projected fuel cost increase from the increased surcharges gives: negative €540m at Air France, negative €516m (cont. p.7)