The early wave of coronavirus-related travel restrictions, reliance on international flights and a high share of fuel-hedging meant that European airlines' operating and financial performance was hit harder than that of global peers in 1H20 and is only recovering slowly, Fitch Ratings says.
Differences in route structures, target customers, cost bases and various measures to enhance balance sheets will lead to diverging recovery patterns.
European airlines faced strict travel restrictions in, out of and across the continent from March. Most of their fleet was grounded throughout 2Q20, leading to capacity being reduced by about 86% yoy during this period, well below the global average of 65%, according to the OAG.
The financial shock was exacerbated by large reported losses due to over-hedging. European airlines hedged a higher share of expected fuel consumption compared with their peers in North America, the Middle East and Asia before the crisis. Those airlines with a significant portion of fuel consumption hedged were largely out-of-the-money due to low oil prices and were less able to reduce their fuel-related costs in line with exceptionally low consumption.
“We expect intra-Europe low-cost carriers, such as Ryanair and Wizz Air, to revert back to pre-pandemic levels faster than international full-service carriers, such as BA, Etihad, Lufthansa and Air France-KLM. Despite weak international demand for Aeroflot, its recovery may be boosted by its large domestic base that has a low number of annual flights per capita,” Fitch said in its report.
Nevertheless, Fitch-rated EMEA commercial airlines are among the strongest in the industry. The ratings agency expect several smaller, financially weaker airlines to fail, providing consolidation opportunities. Wizz Air anticipates resuming its double-digit growth in capacity, IAG is still considering buying Air Europa and Aeroflot has recently announced its target to reach 130 million passengers by 2028 (2019: 60 million), largely domestically.