COVID has thrown the world’s airline industry in a deep crisis as it struggles to return to some form of normality. This industry’s contribution to global GDP is not all that high. But it is undoubtedly critical to other industries’ economic infrastructure, especially the hospitality industry.
More than 60 per cent of the world’s commercial aircraft have been grounded.
The International Air Transport Association (IATA) expects that in 2020 the passenger revenue of airlines would have dropped by 55 per cent.
So what strategies are airlines in Europe adopting to secure their future?
When a crisis like COVID that hardly anyone was predicting occurs, it spawns many urgent, unexpected and unpleasant events, leaving little time to organise and plan an appropriate response. Traditional response strategies are of little use at such times.
After two decades of closely tightening the availability of state aid to ailing airlines, the European Commission suddenly opened the floodgates of state subsidies. The Dutch, French, German and Italian governments with the Commission’s consent supported their large airlines massively.
Fortunately, even extraordinary crises do not last forever; exceptional financial measures similarly do not prevail forever. Whatever shape the ‘new normal’ will take, most airlines will have to review their strategies and business models.
It is unlikely that we will see major European airlines returning to state ownership indefinitely. The competition forces set free in the last three decades will continue to distinguish the winners from the losers even in this industry that is the bedrock of economic growth in all countries.
The global airline industry changed forever as a result of two major developments in the last three decades. The European airline deregulation started in the late 1990s. It reached its climax with the EU-US Open Skies Agreement of 2008. The competitive forces unleashed by deregulation soon gave rise to the emergence and phenomenal growth of low-cost carriers that now dominate the European skies.
It is unlikely that we will see major European airlines returning to state ownership indefinitely
European airlines are slowly giving indications of how they are reviewing their business models. They know that their future cannot depend on the state aid’s endless flow. Often their plans are based on hybrid strategies.
The first strategy adopted by practically all airlines is retrenchment. All European airlines grounded most of their fleets and drastically curtailed their operations. But beyond these short-term tactics, some airlines are beginning to hardwire retrenchment even in their longer-term strategies. For instance, Air France has brought forward the retirement of its A-380 aircraft and restructured its domestic network with fewer scheduled flights. Low-cost carrier Transavia will fill the gaps in the French network. Lufthansa took similar retrenchment action and repositioned itself to be 20 per cent smaller soon.
Other airlines are adopting a persevering strategy. Alitalia, undergoing yet another transformation, will mutate into a new airline but with the same structural weaknesses that undermined its success in the past. The Italian government will exert pressure on the EU competition authorities by arguing that the ‘new’ national carrier is crucially vital for relaunching the struggling Italian economy.
The persevering strategy is also the preferred choice of some low-cost carriers. Ryanair remains determined to drive price competition in the post-COVID market, even if many analysts argue that air travel will inevitably become more expensive. Medically-driven directives could restrict the optimisation of seat capacity on aircraft.
Some airlines seem to prefer innovative strategies to carve a significant slice of an overcrowded market. British Airways is focusing on expanding the UK-Australia services through a joint venture with Qatar Airways. IAG seems still determined to take over Air Europa. Wizz Air has ambitions to expand its business by entering new markets in Europe and the Middle East.
Finally, an exit strategy is an option for both large and smaller airlines. Norwegian Air Shuttle has recently filed for bankruptcy protection. British Airways is likely to abandon its Gatwick operations. Lufthansa is expected to dispose of its Germanwings low-cost subsidiary. Polish LOT may give up its quest to take over Condor.
The shake-up in the European airlines industry is not just the result of COVID. The European airlines market continues to be fragmented. It suffers from low profitability because of excess capacity. Those airlines that in the last few decades never adapted to the market’s new realities will struggle even more in the coming decade.
State aid is a crutch that can restore mobility for a short time. But it can never replace a realistic business model underpinned by sustainable strategies for a tough competitive market.