Editor’s Note: This article was first published in Skift Airline Weekly on August 6, 2018.. 

Most of Europe’s publicly-traded airlines have now reported their second-quarter results. A few like Aegean and SAS will report later this month. Others like Virgin Atlantic, Alitalia, TAP Air Portugal and LOT Polish—as non-public companies—generally keep their financial reports to themselves. Even without total transparency, however, there’s enough new information to delineate the key trends and forces shaping Europe’s airline sector midway through 2018.

Here, in no particular order, are the most important:

— The sector maintained healthy profit margins in the second quarter: There’s lots of variation by airline, but collectively, the eight carriers featured on our page nine earnings scoreboard—which represent the vast majority of European capacity—managed a 10 percent springtime operating margin, only a point less than the 11 percent they jointly earned last year. Taking the Easter shift into account, it’s fair to say that unlike its U.S. counterpart, Europe’s airline industry showed no meaningful year-over-year profit deterioration.

— For Europe’s Big Three, the most powerful force in their favor was booming North Atlantic demand: Lufthansa, Air France-KLM and IAG had nothing but good things to say about their North American routes, enriched by bustling corporate demand for premium seats, the demise of Air Berlin, ongoing support from joint ventures, new long-haul planes, good economies on both sides of the ocean and robust tourism is both directions. Unit revenue trends were exceptionally strong even with the introduction of new basic economy fares and aggressive capacity growth by some—IAG’s second quarter North Atlantic ASKs were up 10 percent year-over-year.

— But the transatlantic boom didn’t benefit everyone: Nordic low-cost carriers watched the party from outside. Despite its many North American routes, Norwegian lost money again this spring, deepening a growing existential crisis. Transatlantic-heavy Icelandair lost money too, agonizing about intense fare competition. Wow Air’s finances aren’t public, but viewing the competitive situation it faces in markets like Dallas-Fort Worth doesn’t inspire confidence—nor does the situation at Icelandair (which directly overlaps more than half of Wow Air’s routes and ASM capacity, according to Diio Mi schedule data). Add to this Wow’s decision to exit routes like Miami and (at least for the winter) Tel Aviv. Primera, another ambitious Nordic LCC—although one whose busiest bases are in the U.K. and Spain—is also cutting routes.

And SAS, which has done relatively well in recent years? It will report later this month. It does have one thing Norwegian, Icelandair, Wow Air and Primera don’t: lots of corporate and premium traffic, long-haul and short alike. Finnair is its own special case—it has little overlap with the Nordic LCCs and lives and dies by what happens in Asia, which performed well enough for Europe’s airlines this spring, even if it wasn’t the unequivocally positive story North America was for Europe’s full-service carriers. Finnair noted new routes by Chinese carriers, Lufthansa said only that Asia “held up well,” Air France-KLM reported some softness in Asian points of sale and IAG highlighted new competition from Cathay Pacific for one. But strong premium demand on Asian routes mitigated such concerns.

— Nordic LCC problems aside, long-haul generally fared better than short-haul: While true that Europe’s airlines saw their short-haul routes benefit significantly from the demise of Air Berlin and Monarch, and the bankruptcy of Alitalia, long-haul-heavy carriers tended to do best this spring. IAG’s British Airways and Aer Lingus are the best examples of this, earning extremely strong margins. Iberia too implied that its pretty good results stem mostly from strength in Latin America. Within the Lufthansa Group, Lufthansa mainline and Swiss—both long-haul heavy—combined for a 14 percent second quarter operating margin, besting even IAG. KLM by itself came close with a 12% showing. Air France by itself… well, that’s another story. But even there, long-haul trends were strong. Ignore the Air France strikes, and Europe’s Big Three—relying heavily on long-haul routes—aren’t seeing the same level of year-over-year margin declines as their U.S. Big Three counterparts.

In fact, margins are now converging, ending a situation in which the U.S. side was performing vastly better. IAG’s second quarter margins even rose a bit year-over-year. Ditto for Finnair. Europe’s short-haul-focused carriers, meanwhile, saw steeper year-over-year margin drops and a bigger set of problems more generally. True, the Easter shift was probably more impactful on short-haul. But short-haul carriers also faced severe air traffic control disruptions, bloody turf wars (i.e., Vienna), narrow-body delivery delays and the World Cup.

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To be perfectly clear, Ryanair, easyJet and Wizz Air are all doing extremely well—easyJet even raised its full-year profit forecast. But Ryanair and Wizz suffered year-over-year second quarter operating margin declines of nine and five points, respectively (easyJet only reports semi-annually). Ryanair, of course, has a new set of labor woes to address and Laudamotion losses to absorb. easyJet is still absorbing heavy losses at Berlin Tegel. Lufthansa’s Eurowings and IAG’s Vueling, incidentally, were both the worst performing airlines of their respective companies. Transavia did well, but with help from a French railway strike, not to mention strikes at its parent company.

— Cost trends in Europe are better than cost trends in the U.S.: Examples of significant cost inflation aren’t entirely absent among Europe’s airlines—think of Ryanair’s spiking labor costs. But in most cases, Europe’s airlines are reaching concessionary labor deals with their unions—reforming pensions, for example, and allowing more production at lower-cost platforms. At least as importantly, Europe’s airlines didn’t see nearly the same degree of fuel inflation as their U.S. brethren, helped greatly by hedges and local currency strength. But keep in mind: Starting in mid-second quarter, all of Europe’s major currencies began losing value against the U.S. dollar. Disruption costs, airport costs and taxation are also often more burdensome in Europe.

• Consolidation remains a hot topic: Air Berlin disappeared, but it’s planes and people dispersed across the industry, winding up with easyJet, Eurowings, Ryanair and Thomas Cook. Monarch’s Gatwick slots went to British Airways and its Luton slots to Wizz Air. Less discussed was a merger between Travel Service and Czech Airlines. Brussels Airlines is settling into its new role as long-haul specialist for Eurowings. Virgin Atlantic is moving into the orbit of its new shareholder Air France/KLM. Ryanair won control of what’s now called Laudamotion.

And the fates of Norwegian and Alitalia still hang in the air, with no shortage of interested suitors. Thomas Cook might sell its airline business. And Big Three joint venture activity isn’t slowing, with Air France/KLM working not only with Virgin but also Spain’s Air Europa (while saying “arrivederci” to Alitalia). Lufthansa is flirting with Avianca, and IAG is preparing to work with LATAM and perhaps China Southern; it also wants Aer Lingus to join its JV with American.

—Tourism is strong: Not only is leisure travel important to Europe’s airlines. It’s also a staple of many European economies, in some cases the biggest source of foreign currency and export revenue. When Asian tourists stopped going to Europe two summers ago, repelled by a spate of terrorist attacks, airlines like Finnair suffered badly. That’s not the case this year, with arrivals up to most countries from most regions. The revival of tourism markets like Turkey, Egypt, Morocco and Tunisia threatens to draw some travelers away from places like Spain and Portugal. But this is more of a problem for countries than it is for many airlines, which can quickly and easily shift capacity east and south. Note also that outbound tourism from key European source markets, including the U.K. (despite Brexit concerns), remains generally strong.

— Eastern European markets are growing rapidly: Traffic data from Airports Council International (ACI) for the first five months of 2018 shows some remarkably high rates of growth in countries like Poland (airport traffic up 17 percent year-over-year), Lithuania (up 16 percent), Hungary (up 15 percent) and Bulgaria (14 percent). Even Greece, a more mature market, enjoyed 11 percent growth. Traffic growth is generally slower in Europe’s west, especially in big markets like Germany, where Air Berlin’s loss resulted in airport traffic growth of less than 2 percent from January through May.

The same is true for the U.K., which lost Monarch. France, hurt by strikes, saw below-average growth of just 4 percent. Sweden’s growth was 2 percent. There were some western standouts though: Italy, despite Alitalia’s bankruptcy, notched traffic growth of nearly 7 percent. Ditto for Spain. Passenger volumes in Portugal, meanwhile, spiked 10 percent. As for individual airports, Frankfurt and Madrid stood out among the continent’s mega-hubs, each with 9 percent growth. Amsterdam’s figure was 6 percent, while Paris CDG and London LHR grew 2 percent. Double-digit growth stars through May included Lisbon, Milan MXP, Helsinki, Athens, Warsaw, Prague and Budapest. The loss of Air Berlin caused Düsseldorf, Berlin TXL and Hamburg to shrink year-over-year.

— The upcoming summer looks good: There’s some bearish talk for sure: Air traffic control woes will persist. Fuel pressures could worsen. Some bookings were lost as Europeans stayed home to enjoy the World Cup (the second half of which happened during the second quarter) and unseasonably hot weather. Brexit worries are mounting with just months left before actual exit (still no disengagement deal yet). Economic indicators suggest some signs of weakness. The U.S. dollar is strengthening. But in the end, the consensus is that the third quarter is characterized most importantly by strong demand, especially to North America but also on short-haul intra-European routes popular with holiday-makers. Then comes the winter, whose off-peak chill could further escalate pressure on struggling carriers, and ultimately advance the cause of consolidation.

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Photo Credit: Lufthansa is among those European airlines with surging profit. Skift