Greece’s Aegean Airlines, riding a wave of inbound tourism, reported an 18% operating margin for the April-to-June quarter. That was just a point less than what Europe’s profit champion Ryanair earned for the same period, and it puts Aegean in the top 10 for second quarter operating margins worldwide among airlines tracked by Airline Weekly.
The Athens-based Star Alliance carrier, generally successful during the 2010s despite Greece’s depression-like economic conditions, is now taking advantage of the country’s relatively fast-growing economy. Thanks in large part to a booming tourist sector, Greece’s economy grew at an annual rate of 2.7% from April to June, compared to less than 1% for the European Union as a whole. Greece grew even faster than the U.S., where the economy grew 2.1% in second quarter.
Aegean took advantage by expanding aggressively. During the quarter, the airline grew capacity, measured in ASKs, 25% year-over-year, while increasing its international passenger volumes by a third. Revenues increased 37%. Italy, Spain, Germany, Scandinavia, Israel, Egypt, and Saudi Arabia were among the markets where Aegean added new flights.
According to schedule data from Cirium Diio, Aegean’s second quarter capacity also exceeded that of the same quarter in 2019, in this case by 6%. Much of its growth since the pandemic has come at its two busiest airports, namely Athens and Thessaloniki, where it’s added lots of new flying to points throughout Europe and the Middle East. Its largest country markets outside of Greece are Germany, Italy, and Cyprus.
Aegean does not fly any widebody planes, meaning it does not serve any overseas markets like North America or east Asia. It does however sell intercontinental access via its membership in Star. A new partnership with Emirates, meanwhile, allows it to market the Gulf carrier’s nonstop flights between Athens and Newark. Olympic Air, once the state-owned Greek airline flying to points across the globe, became an Aegean subsidiary more than a decade ago. It now operates just turboprop planes on regional routes.
Aegean’s second-quarter profits far exceeded its first-quarter losses, positioning itself well to earn money for the fully year. The current July-to-September quarter, typically the strongest period of the year for European airlines, is progressing well, with demand remaining strong.
“There’s nothing right now that shows a reversal of any of the trends we’ve seen,” said Aegean’s chairman Eftichios Vassilakis during a company earnings call. He and chief executive Dimitrios Gerogiannis also spoke of “exceptionally strong” cash flows and the company’s full repayment of money it borrowed during the Covid crisis. They also attributed part of this year’s demand strength to domestic Greek travelers, though they remain a minority of Aegean’s customers. Most of the people on its planes are foreigners flying to Greece as tourists. During the 2010s, Greek-origin demand was largely negligible to Aegean’s business, but it’s starting to become more meaningful as the local economy improves. The airline hopes this new source of demand will de-seasonalize the business somewhat, leading to an extended peak season.
For all the powerful tailwinds advancing Aegean’s business this year, the airline does face challenges. One is that rival carriers are likewise seeking to capitalize on the Greek tourism boom, adding capacity on key routes. Aegean does claim it’s nevertheless gaining market share.
In addition, cost inflation is a concern. Labor costs, for example, rose 53% year-over-year last quarter, outpacing the company’s 37% revenue growth. A modest 3% increase in fuel costs mitigated the impact. But fuel costs have jumped sharply since the start of the current quarter. Rising airport costs, incidentally, is another big challenge. Ditto for rising interest rates and a strong U.S. dollar.
Central to the company’s plan to manage cost inflation is the introduction of new Airbus A320neo-family jets, which offer greater fuel efficiency and lower maintenance costs. But like many airlines across the industry, Aegean faces reliability issues with its Pratt & Whitney GTF engines. Regarding the engines, said Vassilakis, “The news has not been good in the last few months … The effect is basically we need to keep more spare aircraft, [which] has a utilization effect.”
The GTF problems are also impacting the ability of Airbus to deliver new planes on time. And the later planes arrive, the more Aegean typically must pay, given price adjustments for inflation over time. It hopes to claw some of these cost damages back in the form of compensation from Pratt and Airbus. But management doesn’t sound hopeful. “There have been some serious discussions, and there will be some more, about how this can be partially mitigated by them, or fully one would hope,” said Vassilakis. “But it doesn’t really happen that way.”