Is Europe ready for some airline consolidation yet?

Just before the pandemic hit the industry in 2020, airline leaders were positive that Europe was about to have a much-needed round of consolidation. They agreed that there were way too many airlines, fighting for the same piece of cake. Covid has delayed this, but what is the view two years on? AirInsight asked some CEO’s at the recent Airlines 4 Europe Aviation Summit in Brussels. Is Europe ready for some airline consolidation yet? If there is one example of consolidation, it must be the upcoming privatization of ITA Airways. Lufthansa Group, Delta/Air France-KLM, and Indigo Partners are all interested in taking a share in the carrier that succeeded loss-making Alitalia in October. However comes out as the winner, it will mean that one of the leading airline groups will grow its presence in Europe. ITA's future If Lufthansa wins, it adds ITA Airways to its stable that already includes SWISS, Austrian Airlines, Brussels Airlines, Eurowings (Discover), and Air Dolomiti. Lufthansa is keen to add ITA to its portfolio, as Italy is the airline’s second-biggest international market after the US. If Delta Airlines and Air France-KLM are the preferred bidder, ITA will cement its role within the SkyTeam alliance and form a Dutch-French-Italian connection. With Indigo Partners coming out number one, ITA Airways will like to team up with ultra-low-cost airline Wizz Air, which has a growing presence in the Italian market. Ryanair and easyjet think that any purchase of ITA Airways won't make a huge difference in Europe's airline market. (ITA Airways) For Ryanair and easyjet, Italy is also a market of key importance. A takeover of ITA isn’t bothering Ryanair's Michael O’Leary that much: “It’s more of the same consolidation process. ITA will not survive as an independent airline. Personally, I think Lufthansa will take it over, but ITA has become a much smaller airline. Its market share in Italy will be down to ten percent this year compared to 20-25 percent of Alitalia. We have gone up from thirty to forty percent. What ITA will do as a subsidiary of Lufthansa is just feed passengers into Munich and Frankfurt. There will be no expansion out of Italy. ITA does need a partner to be sustainable and Lufthansa or Air France-KLM would be equally good partners, but all they want to do is what they did in the past with Alitalia: suck the feeder traffic out of Italy into their hub airports. There will be no development in Italy. Italy needs Ryanair to do that development for them.” Easyjet CEO Johan Lundgren says: “I don’t think that there is any surprising movement with ITA. As you know, we have been in Italy for a long time. There was a time when we said we had public conversations but we withdrew from that. Look, there will always be some companies that take the opportunity to try to be opportunistic. But the issue is that there isn’t a single airline here that has not been damaged heavily by the Covid-situation. Everybody is focusing on being in the best shape possible. Certainly, at easyjet, we don’t need an acquisition to be successful in the future.” If ITA Airways joins one airline group or another, won’t make much difference, Lundgren agrees with O’Leary: “No, I think what will happen is that they will bring a lot of the network in to support the long-haul hubs (of Lufthansa or Air France-KLM). Which will actually be beneficial for easyjet, because that is not our routes.” Last year, easyjet was approached by Wizz Air about a take-over by the Hungarians, something that was quickly rejected by its Board. According to Lundgren, his airline doesn’t need a partner. “No. We are not against a transaction as such, but it has to deliver value to the shareholders and it has got to be something that we can operationally deliver. We are very confident in our stand-alone plans.” Scandinavian unrest Further North in Europe, Scandinavia has been seen as a region that could be up for some consolidation. There are many small to medium-sized airlines, trying to catch market share in a comparatively small market. Pre-Covid, Norwegian used to be a strong player, with a significant pan-European network plus its low-cost long-haul routes to North America. The pandemic accelerated Norwegian’s refocus on just Europe, but it has got some competition at home from start-ups Flyr and yet-to-start Norse Atlantic. In Sweden, SAS has announced another restructuring plan that should confirm its long-term future, but its position seems fragile. When pilot unions walked away from negotiations last week, CEO Anko van der Werff warned that their move put the existence of the company at risk. SAS is also being confronted with more competition, with Wizz Air, Ryanair, Norwegian, Finnair, and airBaltic all growing their presence. SAS is in the midst of a restructuring that must be successful, or its future could be at stake. (SAS) Mentioning Finnair, the airline was a strong niche-player pre-pandemic, with a profitable network to Asia. The Covid-crisis all disrupted this and now the carrier is handicapped by the war in Ukraine and the closure of Russian airspace, forcing it to reroute its flights and fly much longer distances. Finnair hopes to compensate for the lost revenues by launching new services to the US, right from SAS's front door at Stockholm Arlanda. And then there is airBaltic, a small carrier also hit by the pandemic and the war in Ukraine but being successful in attracting new revenues by wet-leasing its popular Airbus A220-300s to Lufthansa subsidiary Eurowings and Eurowings Discover and to… SAS. In May, airBaltic will open a base in Tampere (Finnland), an airport where Finnair doesn’t have a base. Early signs of consolidation Will there be consolidation in the Scandinavian market? Finnair CEO Topi Manner: “Generally, consolidation has been slow during the pandemic. I think it will remain slow in the very near future but, of course, we have started to see things emerging gradually. Lufthansa has shown interest in ITA, in the US there is the merger between Frontier and Spirit. Those are early signs of consolidation and I think we will be seeing some more of that, also in Europe.” “For Scandinavia, I think the jury is still out”, Manner adds. “There are significant changes in the marketplace. Every airline in Scandinavia is sort of repositioning for post-pandemic growth. As far as Finnair is concerned, we are absolutely strong enough to go it alone. We are developing ourselves as an independent airline, that is our strategy. And we have the backing of the government. We are pivoting to the West and on organic growth.” An airBaltic Airbus A220 at Stockholm Arlanda Airport. SAS has got itself some stiff competition at home. (Stockholm Arlanda Airport) airBaltic CEO Martin Gauss says: “We are the number one in the Baltics, in Estonia and Latvia the clear number one and in Lithuania number two. We took the decision to step out of the Baltics by opening our first base in Finland in Tampere because Finnair stepped out of there and only offers a bus service. We will continue doing this, but I would say that the SAS-likes and Finnair-likes, large airlines with long-haul networks, will also grow. That SAS has social unrest doesn’t mean they or Finnair won’t grow out of the crisis in the future.” “Unless we go back into a crisis mode, I don’t see much change on this (consolidation) in the Scandinavian market. All airlines are adding capacity this summer”, says Gauss. “If we have a normal development this year, everybody is above 100 percent capacity next year, including SAS and Finnair. Long-term, we have to earn our costs. During the crisis, we were all supported in different ways by different shareholding structures, but now we need to go back to doing our business.” Gauss says that airBaltic will report “a very sight positive EBITDAR for last year and we have forecasted a very strong EBITDAR for this year and in 2023 should be above 2019 levels”. airBaltic wants to grow beyond eighty aircraft Until airBaltic has repaid a €90 million loan to the Latvian government with the proceeds of a public offering, its freedom to act is limited. “EU guidelines say that the loans have to be repaid in five to seven years or, in our case, 2025-2026. We expect our IPO in 2024 if the markets are right. And then the airline will be listed on the stock exchange and that will change the shareholder structure. The new capital we plan to use for the further expansion beyond fifty aircraft, as we still have thirty options. We might even go to eighty to 100. If we continue doing what we did in 2019, airBaltic can replicate its model everywhere in Europe. But you need a certain size of some fifty aircraft. We try to get to that size, because we see how difficult it is if you are too small.” It's probably just too early to predict if and how consolidation will change the landscape in Europe, be it Italy or Scandinavia. Or Spain, where the acquisition of Air Europa by Iberia/International Airlines Group (IAG) is still not confirmed, although IAG is offering a €100 million loan to the independent carrier. The topic is too sensitive, it seems, as IAG CEO Luis Gallego avoided any questions.

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