The pandemic has had a devastating effect on the European airlines’ industry. While the prospects of an economic recovery look brighter than they were last year, many European airlines will struggle to survive in the long term.
Bailing out airlines in the context of the COVID-19 crisis is, undoubtedly, a legitimate emergency measure. Professor of international management at the University of Antwerp, Sascha Albers, argues that this emergency support “might serve as a pretext to return to state-owned carriers serving political agendas, at least for some governments”.
The state aid being poured into European legacy airlines is unprecedented in the last two decades when the more prominent national airlines operated in a relatively free market after having been privatised. British Airways was privatised in 1987, followed by Lufthansa in 1997 and Air France in 1999. All these major airlines are now virtually under state control thanks to the emergency aid they sought from their governments.
It is still too early to predict how the post-pandemic era will affect the European airlines’ industry’s dynamics. Strong unions at former state-owned carriers and political interference in commercial operations would probably be too tempting for some governments who weigh the political risks of job cuts.
Currently, the European Commission has had to deal with state aid requests from the major European airlines Air France-KLM, Lufthansa and Alitalia. The Commission has already approved a €4 billion bailout for Air France-KLM, which will see the French government re-emerge as its biggest shareholder with a stake of up to 30 per cent. The French-Dutch airline had to give up 18 slots out of its 1,000 slots at the two Paris-area airports.
Consolidation of the sector is inevitable
Ironically, large European legacy airlines in distress have better negotiating clout in the present circumstances. The Commission finds itself under significant political pressure to rubber-stamp aid and save the region’s economies. All it can do is instil some commercial discipline on troubled airlines not to distort excessively competition dynamics.
The template used by the Commission to approve state aid to various airlines includes forcing them to give up airport slots, restricting executive compensation and banning acquisitions. These tactics have been challenged not just by private low-cost airlines like Ryanair but also by the negotiating teams of legacy airlines waiting in the queue to get the Commission’s approval for state aid.
Alitalia is a classic example of a troubled company that has been in restructuring mode for a few decades. The Commission is inclined to approve €3 billion of state aid subject to conditions that the Italian government finds too hard to accept. Italian Industry Minister Giancarlo Giorgetti said that the EU wants Alitalia to free up as many airport slots as possible, but this is not in the interest of Italia Trasporto Aereo (ITA). This new company should be taking over from the moribund national airline.
The EU wants ITA to give up as many as half the airport slots of Linate, Milan’s more popular airport, drop the Alitalia brand and give up the old carrier’s handling and maintenance divisions. This is political dynamite in Italy’s exceedingly confrontational political system.
The different weights and measures used by the EU with Air France-KLM and Lufthansa on the one hand and Alitalia on the other are that the former two airlines were profitable before the pandemic, while Alitalia was not.
Smaller airlines face a bleaker prospect. In the last several months, 13 airlines that operated in Europe either went bankrupt or under creditor protection. Europe’s airline industry remains very fragmented, depriving it of much-needed profitability and liquidity. More than 55 per cent of European capacity was controlled by the five largest airline groups in 2019.
Competition in the European sector will remain fierce in the coming few years, even if demand increases faster than expected. The agility of no-frills airlines could prove an advantage, enabling them to adapt to the rapidly-changing environment and cherry-picking in passenger demand pockets.
Focus on cost control is a helpful tool for struggling airlines. But it is no silver bullet. Reducing labour costs is more challenging for legacy airlines due to their typically unionised staff’s bargaining power when negotiating redundancies. The European airline industry’s huge overcapacity will be the critical factor that will define airlines’ future and determine who will survive and who will remain grounded.
Consolidation of the sector is inevitable. Smaller operators will find they can no longer compete with larger airlines with the financial firepower to invest in a more sustainable, environmentally friendly and efficient industry.