European airlines count the cost of airspace closures
Events continue to move rapidly in Ukraine
In my last post, I considered the likely impacts on European airlines of the events in Ukraine. One of the biggest impacts is the rise in fuel costs and the news on that continues to worsen, with the price of Brent crude standing at $106 as I write this, up 8% today alone.
I also highlighted the risk to European airlines of Russia closing its airspace for overflights. That risk materialised very rapidly, following the decision by European countries to ban Russian airlines from their own airspace, which triggered the inevitable response.
As I pointed out in that post, the implications for flights to South East Asia is relatively manageable, adding about an hour to flight times from Europe. That will add to costs, but Russia has long extracted a “toll” from European carriers for overflying the country. In many cases, the fees have been set at levels designed to extract the majority of the cost benefit for the shorter routings. Allowing for this, the net cost hit to European carriers from avoiding Russian airspace is likely to be smaller than you might think.
It is a different story for more northerly points, such as China, Japan and Korea, where the extra distance involved in avoiding Russia is much bigger. In this post, I’m going to focus on the implications to Europe’s airlines on those markets and which other airlines might stand to benefit.
Europe to North East Asia
The short-term impact on European carriers is much lower than it would have been in “normal times” (if anyone can remember what those look like these days). That’s because the Asian market is the one part of the world where pandemic related travel restrictions continue to kill travel demand. In January, total capacity from Europe to North-East Asia was only 15.5% the level two years earlier.
Looking at the breakdown by carrier, British Airways was not operating at all and leading carriers like Cathay Pacific were operating a skeleton schedule, due to the draconian COVID restrictions in Hong Kong. In the chart below, I’ve coloured the bars red for the European airlines which are affected by the overflight ban. The Russian carriers are in black. They are not able to operate to Europe now, and are therefore completely out of the market for flow traffic from Europe. That leaves the Asian airlines, coloured in blue, which continue to overfly Russia and stand to be the main beneficiaries of the restrictions.
Source: OAG, GridPoint Analysis
Looking forward, carriers had been planning to ramp up capacity on the assumption that Asian markets would reopen. Published capacity for July is still only around 50% of pre-crisis levels, but if the overflight restrictions are still in place by then, European carriers will be forced to revisit even those reduced capacity plans.
Source: OAG, GridPoint Analysis
On these charts, I’ve left out Turkish, even though OAG includes Turkey in its definition of the Europe region. In the case of the Europe - North East Asia market, I think it is better to consider it in the same “bucket” as the big Gulf Carriers. In normal times, none of these carriers would be that relevant as competitors for most of the Europe to North East Asia market. Connections through Istanbul or the Gulf are simply not competitive for anything other than Southern European traffic. None of these carriers need to overfly Russia to get to Asia, but so far at least they remain unaffected in any event as their governments have not banned Russian airlines. If such a thing were to happen, it would be their flights to the USA that would be badly affected.
I still think that it will be the Asian carriers that are the main beneficiaries of overflight restrictions on European carriers, but these carriers will also benefit to some extent.
Joint venture partnerships
In the very short-term, European carriers have cancelled their flights to Japan, China and Korea whilst they consider how to respond longer term.
One thing to note is that the European carriers all have joint venture deals with Asian partners, so one quite likely outcome in the near term is for the European airlines to let their partners do the flying and route their customers on those partner services. Whether the structure of their joint venture deals allows them to fully share in the benefit their Asian partners will be getting is not fully clear. Those joint venture deals usually divide revenues or profits in proportion to capacity operated, so European operators won’t automatically share the uplift the Asian partners get if they don’t operate. These are the kind of times that really test the strength of these relationships.
Finnair's challenge
Finnair probably has the biggest challenge of all the European carriers. These flights make up a big part of their capacity in normal times and are central to their whole business model.
In response to the airspace closures, the company suspended its profit guidance for the first quarter, saying:
“The crisis in Ukraine touches all Europeans, and we understand the EU’s decision to close its airspace. We are implementing our contingency plan as the situation has a considerable impact on Finnair. Bypassing the Russian airspace lengthens flight times to Asia considerably and, thus, the operation of most our passenger and cargo flights to Asia is not economically sustainable or competitive”.
The geographic position of Helsinki has allowed Finnair to operate highly efficient aircraft schedules to North East Asia. For example, flights to Tokyo leave Helsinki at 17:30, arriving at 10:00 the following day. A quick turnaround sees them depart back again at 11:00, arriving in Helsinki again at 15:00. That’s in time to operate the next flight back again to Asia. So that means that a daily flight uses just one aircraft. Adding 3 hours to the journey time each way to avoid Russia would destroy that. Very loosely, they would need twice as many aircraft to operate the same number of flights.
The second issue is that a big part of Finnair’s traffic on these flights is connecting from other parts of Europe. Finnair’s European flights are timed to connect to their Asian flights, so a big change to Asian timings would require a massive rework of their whole hub timings. Whether it would even make sense to try that is doubtful, as the extra flight time will make them uncompetitive for connecting traffic, compared to connections on Asian airlines who are still able to overfly Russia.
Finally, a lot of Finnair’s customer base is Russian in normal times, as was evidenced by the number of Russian licence plates in the airport car park when I visited the company before the crisis.
The events of the last few days has had the inevitable effect on the company’s share price, which has fallen by 38% since the start of the year, with a 31% drop since Friday.
Source: Yahoo Finance
The airline is 63.4% owned by the government of Finland and it seems likely that some further assistance from their main shareholder is going to be required, unless things resolve themselves quickly on overflights.
Based on the latest news coming out of Ukraine, there seems little prospect of that.
