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Europe's airlines brace for "bloodbath'

When European airline executives look across the Atlantic at the industry's woes in the United States, they see a reflection of their problems, but it is not an identical image. They have some troubles that are all their own.

In recent times, European full-service airlines have confronted the double whammy of a global slowdown before and after Sept. 11, and a relentless challenge by an ever-increasing number of low-cost rivals. In the process, some full-service European airlines, like the venerable Swissair and Sabena have folded. Alitalia is being split into two, and accepting a $490-million rescue package to avoid liquidation. Others have merged or are talking of merging.

The low-cost carriers, led by easyJet and Ryanair, have embarked on brutal price wars, just as record high oil prices are cutting into profits. And, underlying the industry's woes is a sense that the era of high fares sustaining profligate operating costs is well and truly over.

The combination of competitive pressure that low-cost carriers are going to bring to the industry this winter, the high price of fuel, and traditionally lower sales during the season insures "a significant number" of European airlines are going to suffer, said Chris Avery, an analyst with J.P. Morgan in London.

Particularly vulnerable are the dozens of startup airlines that entered the market over the past few years, hoping to become the next low-cost success story, he said. Many of these airlines "will not survive through the winter," Avery said.

Perhaps anticipating the fallout, British Airways sold its stake in Qantas this month, and said it planned to use the 425-million pounds ($768.7-million) it raised to strengthen its balance sheet for acquisitions in Europe.

Just in the past few days, a series of events have again illuminated the ferocious competition in the European airline business as carriers seek to avoid the kind of turmoil roiling the industry in the United States.

Last week, Michael O'Leary, the pugnacious chief executive of Dublin-based Ryanair, the continent's biggest low-cost airline, unveiled a plan to offer in-flight entertainment consoles at a cost of around $9 per flight to lure new passengers as the no-frills carrier readies for what he called a "bloodbath" of price-cutting in their winter schedules. He also announced the opening of several new routes to Spain, with prices starting at less than $4 before airport taxes.

Two days later, easyJet, Ryanair's biggest rival, coupled a scale-back in its fleet expansion plans with an announcement that it would open new routes for the first time from Britain into Ireland _ Ryanair's home base _ another sign of the tooth-and-claw competition for passengers.

EasyJet and Ryanair are facing some stiff competition from a host of copycat competitors. Sixty-seven low-cost airlines operate in Europe, many of them start-ups replacing others that have failed, according to industry figures. With names like Wizz Air, Snowflake, SkyEurope, Germanwings and Globespan, they are channeling an influx of new capital from private equity funds, banks and established airlines to try to attract passengers.

Some of Europe's full-service airlines, like British Airways, are facing such fierce price competition from low-cost carriers that they are offering discounted fares. While the fares are not quite as low, tickets booked several months in advance for specific, unchangeable dates can lower fares on expensive European routes like London-Zurich to around $60 before taxes compared to $900 for a full-fare, fully flexible ticket on the same route.

There is one bright spot here, though. Unlike their American counterparts, European airlines have managed to pass along some of the rising fuel charges directly to consumers. British Airways, KLM and Lufthansa are among the airlines that have added several euros per flight segment to cover the cost of fuel.

European airlines also more consistently use oil price hedging, the purchase of securities to lock in low fuel prices, than American carriers. But hedging varies widely from company to company, and few airlines seem to have predicted the prolonged high prices: Swiss, for example, sold its fuel hedges in March to raise money. Ryanair has hedged fuel prices only till the end of October. The company says it can counteract any profit loss by cutting costs, a strategy analysts expect other lean airlines to follow.

"The issue is how much do fuel costs dent into the earnings recovery?" said Nick van den Brul, an airline analyst for BNP Paribas in London. The rising price of fuel "neutralizes the effect of cost-cutting," van den Brul said.

At the same time, Ryanair and easyJet have warned they will continue to cut prices even though it will eat into profit. Ultimately, O'Leary has forecast, the two giants of the low-cost business will compete on an ever greater number of routes to take market share from the smaller no-frills airlines and from the full-service airlines.

"What we have seen is a structural shift in revenue," said Chris Tarry, an independent airline analyst in London. "People are not prepared to pay as much as they did to travel, so the challenge is to get costs out of the business."