Lowering the flag: Europe’s airlines head for a shakeout
Air Berlin’s travails will not be the last says Bradley Gerrard
It is often said that the airline industry simply has too many seats to fill. You don’t need to look far to prove the truth of this observation. The European airline industry has just suffered its second casualty in a matter of months. What’s more, experts and industry insiders are now confident further consolidation is a given.
German carrier Air Berlin filed for administration this month after its major backer Etihad refused to bankroll the loss-making operation any longer.
The low-cost carrier had been dogged by delays and cancellations, which had resulted in it paying millions of euros in compensation to passengers. This in turn had affected passenger numbers, which fell by 24pc year on year in July from 3.22m to 2.44m.
Etihad, which has a 29.2pc stake in the carrier, said Air Berlin’s business had “deteriorated at an unprecedented pace, preventing it from overcoming its significant challenges”. The Middle East-based carrier was also the largest shareholder in Alitalia, which is in administration.
The factors which allowed Air Berlin and Alitalia to keep flying routes which perhaps both should have cut or reduced are well known. Chief among them is the low oil price, which has helped cut one of the largest costs for all airlines and thus enabled them to maintain schedules which might be unthinkable if oil was at $75 a barrel.
Comparisons are now being drawn with the US airline industry, which underwent major consolidation following the 2008 financial crisis as industry pressures weighed heavily on weaker companies.
The US airline industry lost more than $52bn (£40bn) between 1977 and 2009, according to Forbes, and even though carriers cut the number of seats on offer towards the end of that period, the post-crisis spending squeeze spurred a flurry of mergers and acquisitions.
The trend had started in 2005 with US Airways and American West Airlines and continued post-crisis with four other major deals up to 2013, including United Airlines with Continental Airlines in 2010 and Southwest Airlines with Airtran Airways in 2011.
Fritz Joussen, Tui Group chief executive, thinks there is excess capacity in several European markets.
“I think in time there will be exits of competitors in Europe and we just need to take care of how those exits are managed,” he says.
“What has happened with Air Berlin is not a bad thing. But we are looking at it through the lens of our people and customers.”
Tui signed a deal with Air Berlin a decade ago for it to fly a portfolio of routes using Tui staff and planes. Joussen wants to save those people’s jobs but is not interested in bidding for the whole business.
He acknowledges there needs to be consolidation in the European airline industry, especially given “Air Berlin has not earned any money” in a decade.
“In Germany, we have €19 flights to Majorca, which everyone knows is not sustainable,” he says. “In the US, everyone went through Chapter 11 [a form of bankruptcy] and now everyone is profitable.”
Joussen also points out that the low oil price creates a low barrier to entry for airlines to expand but that the barriers for getting out of the sector are high.
Alex Paterson, a transport analyst at Investec, suggests further consolidation is “inevitable” and is most likely to happen through more airlines being restructured or failing and rivals snapping up the newly available capacity.
“What’s causing things to accelerate is the fact European states can no longer subsidise their flag carriers so they are having to stand on their own feet or fail,” he says.
Beyond Alitalia and Air Berlin, Paterson points out that Romania’s Tarom is being restructured while Poland’s Lot has just endured a major reorganisation, meaning those markets are likely to see rivals pick up market
‘States can no longer subsidise carriers so they have to stand on their own feet’
share. Ryanair has recently launched Ryanair Sun, a charter airline based in Poland which is likely to push out rivals. “Weaker carriers have probably never been under such prolonged pressure,” Paterson adds, pointing out that airports are also potentially hastening the consolidation trend by courting low-cost airlines, because of their high passenger volumes, at the expense of legacy players.
“Fraport, which owns Frankfurt Airport, has just bought 14 Greek airports and it is trying to drive volumes up,” he says. “The current environment, where places like Egypt, Tunisia and Morocco are less attractive, is not lost on them.”
Andrew Smith, principal at global management consultancy Arthur D Little, believes the European airline industry has “lagged behind the US in terms of consolidation”.
“In the past few years the European airline sector has seen record-breaking profitability but this is mostly down to the very low oil price,” he says. “It is still a very fragmented market compared to its cousin across the pond. There’s every reason to think there will be more consolidation.”
Smith pointed out that one factor in further deals could be Brexit. Although he thought the likelihood of flights between the UK and EU being grounded because of the pair failing to strike an aviation agreement before April 2019 was a “doomsday scenario”, he says it could spur some deals – or alliances such as IAG, which owns British Airways, Iberia and Aer Lingus.
“I think there will be more consolidation but you cannot assume it will be straightforward M&A,” he says. “Part of the reason is because of anti-trust rules and alliances are quite a convenient way of solving the problem of market access without having to go over the hurdle of buying an entire airline.”
Paul Moore, spokesman for easyjet, acknowledges there will be consolidation but thinks it is wrong to assume Europe will look like the US. “I find it hard to believe that in 10 or 20 years’ time there won’t be a flag carrier in almost every European state,” he says. “They might be smaller or part of a European group but they will survive.”
Moore says European nations are keen to defend their flag carriers and that European ownership rules could mean a larger number of carriers survive than some might expect. There also aren’t Chapter 11 rules like in the US, which more easily allow major restructurings.
But Ryanair, which chief marketing officer Kenny Jacobs acknowledged had “tried and failed to buy things”, is now getting in on the act with a non-binding offer for Alitalia on the table. The airline’s feisty chief executive Michael O’leary has also expressed some interest in Air Berlin, or at least parts of it, and foresees just five European airline groups in five years’ time – Ryanair, Lufthansa, Air France-klm, IAG and easyjet.