European Airline Consolidation

7 Feb 2014 by Tom Otley
There has been a lot of speculation about the future of the airlines in Europe which are considered "legacy". 2013 has been a very active year with airlines up for sale, and shares bought by Asian airlines. The lost cost airlines (LCCs) Ryanair, Easyjet and Wizzair seem content to fly within Europe and the Mediterranean limiting their activities to Europe, North Africa and the Middle East. Easyjet has stretched its wings to Moscow and Tel Aviv but is withdrawing from Amman. Norwegian on the other hand, while doing the same, is taking all of the advantages of the "open European market" to grow agressively. In 2014 Norwegian will extend its short-haul  operations to include long-haul operations flying from several Scandinavian cities as well as London Gatwick to Bangkok and the USA. This is an experiment which still has to be proven successful. However, its model is under attack from unions (Airwise /Reuters: 5th February 2014). This because it wants to outsource its long-haul employees from expensive Norway to a new subsidiary in (cheaper) Ireland. Vueling is also extending its wings by flying to Banjul and now to Jeddah and/or Dhahran (via the airport of Dammam) in Saudi Arabia. These five LCC airlines together with the more recent start-up, Volotea, aim to range over Europe serving airports large and small regardless of country. They have all found room to expand and it seems that the market is not as yet saturated. If the name of such an operator is innocuous to nationalistic sensibilities, as well as being well run, then it can be successful. Ryanair still maintains its Irishness but is based all over the continent. Easyjet, while being British, is well placed, and successful in such countries as Switzerland, France and Italy. Wizzair concentrates mainly on Eastern Europe, operating from such countries as Hungary, Rumania and the Ukraine. Vueling, despite having the origin of its name based on the Spanish verb "to fly(volar)", is aggressively opening bases in non-Spanish countries. Volotea, using a bastardisation of the same verb in Spanish and Italian, opened in Italy to extend later to France. Its main bases are in these two countries. The founders are the same Spanish ones who founded Vueling. Norwegian Air Shuttle (Norwegian) is the exception. Here the play is on the Scandanavian image of seriousness, reliability, good design and attention to detail. It works but only as long as the day-to-day workings are looked after vigorously. Swissair played the same card from Switzerland but then they took their eye off the ball, lost the plot by trying to expand too far, too fast and went bust taking airlines like Sabena with them. This blowed the myth out of the water about quality being guaranteed just by the name of origin. The replacement Swiss airline is still trying to recuperate the lost ground. This leads us to the "legacy" airlines. These are the ones which were, and usually still are, considered national champions. And they are loaded down with their heritage including their names which are strongly and even exclusively associated with their countries of origin. Air France, British Airways, Lufhansa, Austrian, Swiss, Alitalia, Iberia, etc.etc.These are the ones which are having to adapt as they are losing ground, and have found they need to consolidate. But what are the opportunities? 1 Etihad, the Middle East airline, has taken up a 49% holding in Air Serbia (the former Yugoslav airline JAT).This is to be added to the shareholdings by ETIHAD in Aer Lingus (3%), Air Berlin (29.2%) and 33.3% of the Swiss Darwin Airline which has been renamed Etihad Regional (for Europe) in 2014. ETIHAD thus has varied hubs in Europe that can be served from many differing points. Now it is resolving the ultimate problems to take a stake of 40% in Alitalia.This policy of participation in airlines in Europe and elsewhere has become known as "The Etihad Equity Alliance". It seems to be a fourth alliance even with some of its members remaining in the other alliances of oneworld and Skyteam, but not as yet anyone in Star Alliance. This is probably because of the stricter rules governing participation in that alliance which limits co-operation with non-members. However, it also seems that the model will be principally to provide or feeder services to Etihad - not so much co-operation as domination. 2 Of these, in Aer Lingus the Irish government has a shareholding (25.4%) which it has repeatedly stated it wants to dispose of. Ryanair also has a large shareholding (29.4%) but here it has been repeatedly thwarted (3 times) by the European Commission in its attempts to take over the airline. The airline is looking again at participating in an alliance so might well return to oneworld – though by no means is that certain. IAG (British Airways with Iberia and Vueling) might well want to look after its own back yard with the services across the Irish sea. On the other hand with Aer Lingus wet leasing aircraft(hiring out aircraft and crew) to Virgin Atlantic, as Little Red, for its domestic (UK) services, a closer cooperation with Virgin might well be on the cards. 3 Virgin Atlantic has changed the 49% shareholding in itself from Singapore Airlines to Delta. The EU restrictions on foreign ownership mean that Delta cannot increase that percentage so the rest seem to be safely in the hands of Branson´s Virgin Group. That means that any change can be vetoed by Branson.The result, at present is that Virgin Atlantic and Delta are co-ordinating their services from the UK to USA. However,Virgin Atlantic has to look after its long-haul business outside of the Americas, especially to Asia. It has just announced that it is to stop London-Sydney flights from May and terminate them at Hong Kong.(Routes Online: 4th February 2014). This is because of low yield factors even though the numbers transported have been higher than British Airways. It reckons that it can use its long-haul aircraft more profitably on other routes which do not entail an intermediate stop. It is more profitable to run point to point than with a stop-over point. 4 TAP (Portugal) has been put up for sale by the Portuguese government and will be again. Apparently the only serious bid for the company comes from AviancaTaca This is the Central/South American group which encompasses Avianca and Taca) in principally Columbia and Panama. The European alternative would be its Star Alliance partner Lufthansa. The German airline seems not to be interested. Obviously, Etihad is a contender for its connections into Brazil as well as the rest of South America. Take note that Etihad has decided to codeshare with Air Europa (another Skyteam member) from Madrid into South America. This recognises that even from the Gulf the airlines cannot provide non-stop services to the Americas. IAG might take note of this with oneworld partner Qatar. 5 CSA the Czech airline has sold a shareholding of 44% to Korean Air giving that Asian airline a toehold in Europe. Both are part of Skyteam. 6 Alitalia is the biggest of this bunch and the most problematic. AirFrance/KLM started the year with a 25% shareholding. However, since the Italian government refuses to let the airline die and will not accept AF/KLM´s conditions for taking it over, the money for the operation of the airline for the next six months has been found from wierd sources which have nothing to do with the airline industry. AF/KLM´s shareholding has thus been reduced to about 7%. It remains a member of Skyteam though Etihad, yet again, has been mentioned as a possible white knight. The latest news gives Etihad a predominant chance in acquiring a 40 holding in the Italian flag carrier. (Airwise/Reuters: 2nd February 2014). Lufthansa, on the other hand is trying to throw a spanner in the works, calling the operation between Etihad and Alitalia "unfair competition". 7 LOT is also in difficulties and the Polish government is looking to offload its shareholding. An attempt was made by Turkish Airlines to buy a majority shareholding but this failed due to restrictions on non-EU members buying majority stakes in EU companies. This could be interesting for IAG – it would fill the gap in Central Europe that would need to be filled by a potential permanent loss of Air Berlin to Etihad. 8 Finnair is part of oneworld but its small size makes life difficult. Its advantage is in offering the shortest route to the Orient from Helsinki. However, it does need connections. To sort that problem out it has set up a joint venture with Flybe for domestic and some regional services called FlybeNordic. Interestingly it has a 4.8% shareholding in Norwegian Air Shuttle the low cost airline with big ambitions. Finnair could well merge into IAG and thus still retain its operating independence. On the other hand could not Finnair take the opportunity to merge with Norwegian and use it as IAG seems to be using Vueling? 9 SAS, the Scandinavian airline jointly owned by mostly Danish, Norwegian and Swedish  interests(including 50% still in the hands of the respective governments)has also been mentioned as a takeover candidate. The strongest speculation is for the Lufthansa group to take the airline over.However, Lufthansa is still having to sort out its own problems and those of its subsidiary Austrian and Brussels Airlines (45%) as well as reorganising its regional services (i.e.those not originating at Frankfurt and Munich) into Germanwings. 10 AirFrance/KLM have their hands full at the moment trying to sort out their own finances. It seems that the KLM part is quite boyant but Air France needs drastic treatment. The regional airlines have been absorbed into HOP while the (originally Dutch) low cost airline Transavia now flies as a charter and leisure airline from 4 Dutch airports and Paris Orly. It does not seem that AF/KLM will be buying in the short term though it would probably jump at the chance to take over Alitalia if it could get it under the right conditions - this now seems less likely. 11 In Greece Olympic has just been taken over by Aegean which means that those two are preoccupied with their consolidation. While in neighbouring Turkey, Turkish has its ups and downs with its Star Alliance partner Lufthansa due to its privileged position of flying into/out of 14 German airports, something which the Gulf airlines are not allowed to do.So it will try to build on the advantage of its hub at Istambul. It does still maintain its joint venture, SunExpress, with Lufthansa, however. No movement expected there. 12 In the UK the remaining airlines of any size are headed by Flybe. This is 15% owned by IAG which seems to ignore it. Apart from the already mentioned FlyNordic joint venture with Finnair it also operates a franchise agreement with Loganair for the Scottish routes(mostly) to the Highlands and islands. The other two are the regional Eastern Airways and the reborn BMI Regional. This was sold by Lufthansa to British Airways as part of the BMI group but subsequently sold of to the same investors who founded it originally.This latter is now also operating domestic services in Norway. Into and out of the Channel Islands fly Aurigny Air Services and Blue Islands. The other airlines of note either belong to large travel groups, Thomas Cook Airlines and Thompson Airways, or are dedicated to leisure travel, Jet2 and Monarch. It seems, therefore, that there will not be any movement in these cases. However, Monarch also runs an operation of leisure routes both medium and long-haul which matches Meriadiana´s (mentioned later). This gives it its own attraction as well to IAG, or anybody. Jet2´s offer is much less. 13  One airline which must be appealing for IAG is the italian Meridiana(CAPA: 24th July 2013). This would give it a much needed entry into Italy, one of the biggest airline markets, especially as competition there is hotting up (CAPA: 31st January 2014). It still retains a predominant service from Sardinia and Sicily to mainland Italy, thus making it attractive. Meridiana also flies internationally, to North America, the Caribean, East Africa and even India.This makes it an airline similar to the way Vueling is developing. It also codeshares with a lot of oneworld airlines including BA and Iberia.  Lufthansa has its Air Dolomiti susidiary operating in that country. IAG has its Vueling subsidiary increasing services from Rome but that might not be enough. Vueling will be up against an increased presence of Easyjet and Ryanair as well as the rest. Meridiana is loss making and finding life difficult so could well find IAG the perfect vehicle to continue to develop. Changes are in the offing and because IAG is in the best financial position of the three big European groupings it could well pull off some surprises at the right price. The dark horses would be the Gulf airlines, particularly Etihad, but also the Asian airlines.The non-Europeans would all be limited to 49% shareholdings maximum which might well suit some candidates as it suited Virgin Atlantic. The financial muscle of the bigger airlines would be behind them but they would still retain a measure of independence which could be interesting for nationalistic sensibilities. On the other hand within Europe these limitations do not exist. That means that any European airline could take over any other. The latest news is the article published today - 6th February 2014 by Airwise/Reuters with the title: "Etihad Strategy Faces New Test With Alitalia Move" A couple of quotes are of importance which partly illustrate the tendency in the airline market. "Lacking large populations in their own countries, the Gulf carriers need to feed more traffic from other countries through their hubs in order to fill their planes after a massive order spree at last year's Dubai air show." "In 2013, Etihad's code shares with other airlines and its equity partners brought 1.8 million passengers onto Etihad flights, helping total passenger numbers rise 16 percent to almost 12 million. Emirates carried 39 million passengers in its 2012/13 fiscal year, also a 16 percent increase." "Hogan said that the USD$105 million to buy a 29 percent stake in Air Berlin was recouped within 6 months thanks to additional revenue and cost savings." "Etihad's stake-building strategy and its code shares with Air France-KLM also call into doubt the future of the traditional airline alliances - Star Alliance, oneworld and SkyTeam, groupings that Etihad chief executive Hogan has described as "fractured." "What role the alliances will play in the future is unclear, but it looks like it is a business model that will not last in its current form," Tanja Wielgoss, Berlin-based partner at consultancy AT Kearney told Reuters. "We see a tendency towards more focus on growing organically or via acquisitions." The final part of that article is telling as well as the following one. Are stategic shareholdings the future, regardless of airline alliance groupings? What future holds for Etihad´s strategy especially as it is going to affect the European airline market? Or could it be a step too far? "I find it difficult to fully understand what they're trying to do," said airline analyst James Halstead at Aviation Strategy, adding that Etihad could have just agreed code shares with airlines without needing to buy stakes. "Maybe it's a shot of brilliance by James Hogan. I'd like to give him the benefit of the doubt." We will have to wait and see what the coming months hold for us. Read our contributor biography of Transtraxman.
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