European airlines hit by increased competition and overcapacity

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Lower profit estimates

Leading European airlines, including Lufthansa and Air-France-KLM, have lowered their profit estimates for 2014. The changes are a result of concerns of lower yields due to overcapacity in long-haul routes—particularly to North America and Asia—weak cargo demand, and competition from low-cost and Gulf carriers.

Air-France-KLM declared in July that profits in 2014 may be 12% lower than expected, as it revised its EBITDA[1. Earnings before interest, tax, depreciation, and amortization] estimate for 2014 to 2.2 billion euros from 2.5 billion euros.

Lufthansa lowered its operating profit estimate to 1 billion euros in 2014 and 2 billion euros in 2015—more than 20% lower than its earlier forecast of 1.3 billion euros for 2014 and 2.65 billion euros for 2015.

Part5_Capacity addition by Gulf carriers

Overcapacity in North Atlantic market

In the first six months of 2014, capacity growth more than doubled—to 5.9% from 2.7% a year ago. Load factor has also slipped by 1% during the same period to 82.7%.

Capacity additions by Gulf carriers

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The high growth in capacity by Turkish Airlines and the gulf carriers—including the Emirates, Qatar Airways, and Etihad—from their respective hubs to Europe has taken market share away from leading European airlines. Etihad increased capacity to Europe by 39% between 2012 and 2014. Qatar Airways increased its capacity by 34%. Turkish Airlines increased its capacity by 26%, and Emirates by 22%. Although capacity growth in 2014 still remains strong, it has slowed down this year compared to 2013. The graph above shows the year-over-year growth in weekly international seats[1. Scheduled capacity data for the third week in June and first week in December for each year] from their respective hubs to Europe.

The Middle East has recorded the largest traffic growth, supported by growing economies. You can participate in the growth of these economies through the iShares MSCI UAE Capped ETF (UAE), which concentrates on stocks from this region.

The impact of these capacity additions in international markets is negligible to most U.S. airlines, including Delta (DAL), United (UAL), American (AAL), Southwest (LUV), and JetBlue (JBLU), since their operations concentrate in the domestic market.

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