Airlines do not like winter as demand for seats usually falls and revenues are low. In the very competitive European airlines’ industry, overcapacity keeps troubling both the larger legacy airlines as well as the low-cost carriers that have transformed the holiday industry in the past two decades.
Last year was a tough one for airlines in Europe. Many will remember the interminable delays passengers faced in airports caused both by airspace overcrowding and industrial action by flight attendants and pilots. Last year, Monarch in the UK, Air Berlin and Alitalia went bankrupt. Alitalia, supported by potentially illegal State aid, still flies even if it is now organised in a new company while a search for new owners is intensified. It seems that other Italian transport groups, including the railway operators, could be the new owners.
The biggest low-cost airline, Ryanair, registered a loss of €22 million for the three months to the end of December 2018, a swing from the €113m profit the year before. Despite this downturn, Ryanair says it has no intention of raising prices in the 2019 summer. Ryanair management announced a reorganisation which sees Michael O’Leary move from CEO of the airline to the post of CEO of Ryanair Holdings. Aviation analysts are interpreting this move as signalling the intention of the Irish airline to buy some smaller airlines to consolidate its position.
Another airline on the brink of failure is loss-making Norwegian Air Shuttle. It recently announced a €300 million rights issue to strengthen its capital highlighting the problems it faces as it struggles to stay afloat. Norwegian had an ambitious growth plan aimed at rapid expansion on low-cost long-haul flights. This attractive business model soon stimulated interest in bigger airlines who were ready to pounce on this small airline as soon as it became evident that it was struggling with the cost of running long-haul flights.
Various structural and operational problems are affecting most airlines in Europe
However, Norwegian with the help of private investors switched its emphasis from “growth to profitability” by divesting aircraft, postponing deliveries and continue to focus on cost savings. To keep flying, Norwegian has recently closed several routes and bases to cut costs.
Wizz Air did not fare much better than the other major low-cost European airlines. After an impressive phase of expansion in the past few years, the Hungarian airline saw pre-tax profits plunge 90 per cent to €1.8 million in the last quarter of 2018.
Wizz Air boss Jozsef Varadi made a very relevant point when he said: “We just do not know how Brexit is going to play out and how it is going to affect the revenue lines. What we have started seeing is a lowering of consumer confidence”. With Germany and Italy on the verge of a recession, France facing social unrest, and Britain facing the unknown post-Brexit, it is no wonder that airline leaders fret about consumer confidence.
Various structural and operational problems are affecting most airlines in Europe. The main challenge remains the vast overcapacity that still exists in the market. The European airline industry is too fragmented to give a healthy return to airlines of various sizes to ensure sustainability. The Financial Times recently reported that in the US, after mergers, acquisitions and the failure of smaller rivals, four airlines control 80 per cent of the domestic market by seats; in Europe, by contrast, even the top 10 airline groups can only muster 70 per cent.
The low-cost model will not solve the existential problems of most airlines. Consolidation is the only coherent way ahead, especially for smaller airlines. This consolidation has already started. The Cypriot airline Cobalt went under a few months ago. Iceland’s low-cost carrier Wow won the low-cost airline of the year at the Centre of Aviation awards in Berlin in November. A week after this award Icelandair withdrew from negotiations for a takeover of Wow. Providentially for Wow, Indigo Partners, who already own Hungary’s Wizz Air and Mexico’s Volaris airlines, offered to invest in Wow.
Wizz Air’s CEO Varadi told the Financial Times that some small airlines would continue to exist despite their inability to support themselves. He argues that some central and eastern European countries will continue to support their failing airlines as their governments “believe they need a national carrier for some reason”.
Some aviation analysts insist that the European airline’s industry will have to undergo an American style consolidation in the next 10 years. Hopefully, new airline alliances will see passengers continuing to enjoy the fruit of competition.
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