Europe's airlines undergoing 'organic consolidation'

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The recent spate of European airline bankruptcies began with Italian legacy carrier Alitalia.
The recent spate of European airline bankruptcies began with Italian legacy carrier Alitalia.

Insolvency filings by three long-standing European airlines since early May are part of a slow and ongoing consolidation of the European aviation market, analysts say.

Yet, they are quick to add, Europe's market shows no signs of consolidating to near the extent of the U.S. airline industry, which saw 11 major carriers merge into four between 2004 and 2015.

"This consolidation is an organic one, but it is a slow one," said Jonathan Wober, Europe analyst at the CAPA Centre for Aviation.

The recent spate of European airline bankruptcies began with Italian legacy carrier Alitalia, which initiated insolvency proceedings, the European equivalent of bankruptcy, on May 2, a week after its employees rejected a cost-cutting plan designed to make the chronic money loser profitable.

Alitalia was followed by Air Berlin, which filed for insolvency in mid-August after losing more than $1.2 billion over the course of 2015 and 2016, and after 29.2% shareholder Etihad decided it would not infuse the German carrier with further funds.

Third to fall this year was the British leisure carrier Monarch Airlines, which abruptly ceased operations on Oct. 2. The airline, which had been in business for more than 50 years, primarily serviced Mediterranean destinations from England.

Air Berlin, too, will cease operations, with its last day of flying set for Oct. 28. The carrier has been in discussions with Lufthansa and EasyJet for the acquisition of portions of its fleet, as well as for its valuable landing slots in Dusseldorf and Berlin Tegel airports.

Alitalia remains in the sky for now, thanks to multiple bridge loans from the Italian government. But in bids submitted as part of the insolvency proceeding on Oct. 16, the Lufthansa Group and EasyJet said they are only interested in purchasing portions of the airline. If Alitalia does stay in the skies, all signs are that it will be in an altered, smaller form. 

A common cause in the failure of all three airlines was the difficulty they had competing in the intra-European market with low-cost carriers (LCCs) and ultralow-cost carriers (ULCCs) such as Ryanair, EasyJet, Wizz and Norwegian, Wober said. While LCCs fly 32.5% of the seats in the U.S. market, according to CAPA, they fly 40.4% of the seats in Europe.

ULCCs, most notably Ryanair, are especially important in Europe, accounting for 28% of capacity, according to figures presented at an August aviation conference by the U.S. airline Allegiant, a ULCC. In the U.S., Allegiant said, ULCCs account for just 6% of the market.

Wober added that Alitalia, Monarch and Air Berlin also each had long-haul operations that weren't large enough to compete on level ground with the long-haul networks of major legacy European airline groups Lufthansa, Air France-KLM and IAG (British Airways, Iberia, Aer Lingus and Vueling).

Still, said U.K.-based aviation analyst Barry Humphreys, the specific situations that led to the demise of each of the three airlines were quite different.

Former Italian flag carrier Alitalia still was managed with significant influence from the Italian government and also had to deal with powerful unions that made cost reductions difficult.

Air Berlin, which had been Europe's 10th-largest airline, had tried to reinvent itself as an LCC after the rise of airlines such as Ryanair and EasyJet but couldn't keep its costs low enough, especially while operating a mixed fleet of short- and long-haul aircraft.

Last week, the Lufthansa Group agreed to purchase 81 Air Berlin aircraft as it grows its low-cost unit, Eurowings, CEO Caston Spohr told Germany's Rheinische Post newspaper. Air Berlin remains in negotiations with EasyJet and other bidders for other portions of its assets, the newspaper said.

Monarch had once been primarily a charter carrier that worked with small tour operators and as backup for bigger operators. When LCCs eroded that niche, Monarch tried to become an LCC itself. The airline's final blows came from the Brexit-weakened pound and terrorism in Tunisia, Turkey and Egypt, which led competitors to shift additional capacity into the U.K.-Spain and U.K.-Portugal markets, where Monarch was most exposed.

"The fact that they faced bankruptcy around the same time is mostly just an accident," Humphreys said of Alitalia, Air Berlin and Monarch.

The collapse of the carriers will result in some consolidation of the European airline market, especially if major players Lufthansa and EasyJet buy up portions of Air Berlin or Alitalia. But Air Berlin and Alitalia each accounted for only 2% or so of European airline capacity, Wober said, while Monarch accounted for less than 1%.

Wober said the top five European airline groups -- IAG, Lufthansa, Ryanair, EasyJet and Air France-KLM -- account for approximately 45% of seats as compared with the more than 80% of seats that the top six U.S. airlines account for.

The demise of Air Berlin, Alitalia and Monarch will push an ongoing trend toward the stronger airlines getting stronger.

"I think those five will continue to grow share, but I don't think they'll get from around 45% to 75% or 80% in a few years," Wober said.

Ashley Raiteri, chief information officer for AirHelp, an app that helps passengers claim EU-mandated compensation on delayed and canceled European flights, said that the point-to-point operating models of many smaller European airlines should help them survive.

"I don't see the EU carrier space turning into the U.S. space, because there is not a hub-and-spoke system like there is in the U.S.," he said.

In contrast to airlines that rely more heavily on hub airports, point-to-point airlines can more nimbly adjust their route networks to fit changing marketplaces, Raiteri said.

Humphreys said that rules requiring an airline to be majority-owned by nationals of its base country also make consolidation tougher in Europe, with its large number of countries, than those same rules do in the U.S.

While majority EU ownership suffices for merging airlines that fly only within the European market, those that fly outside the EU must develop complicated ownership structures. That's one reason why Air France and KLM maintain different identities, for example, and it's also why British Airways and Iberia formed the holding group IAG when they merged in 2011.

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