Relentless pace of airline consolidation isn’t a good thing

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No matter how you look at it, what your point of view is, less choice means less competition.

Some might argue that the ultimate result of capitalism unless constrained by law and policy, is at best two global corporations, at worst one. The pace of brands, from cars to foodstuff, to high-tech, energy suppliers, communications and travel, and certainly airlines, being consumed by their peers is relentless.

Take a look in a food cupboard, at your shaving gear, cleaning products, you’ll find probably no more than 5 companies control 90% of thousands of brands.

The same is happening with airlines.

The European experience is not quite as rampant as the experience suffered in the US, where now American, United, Delta, Southwest, JetBlue, and Alaska are all that’s really left of the dozens of airlines that 40 years ago flew the skies. Four airlines control almost 85% of all US seat sales. A few others hold on to rapidly changing markets in the ultra-low cost arena, but airlines like Spirit and Frontier seem to hold on only by their fingertips, even at their best.

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A victim or bad management and poor strategy, but almost certainly a deliberate target of its competitors

In Europe, the inevitable demise of AirBerlin, which had been dragging the bottom of the barrel for four years, barely able to get from one month to the next, has further marched the remaining passengers into two mega-airline’s hands – Lufthansa Group and RyanAir. One saw AirBerlin as inevitable prey, simply unable to compete in what was primarily a German domestic market, and the other simply sucks the life blood out of anything it competes with. RyanAir’s relentless march to being the worlds fifth largest air line has crushed airports and other airlines that don’t play its game. It’s current problems are just a blip.

easyJet isn’t far behind either, and their battle with RyanAir is yet to reach peak – sooner or later they will have to face there’s nowhere left to fight over and the battle will be on.

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Monarch. Day-to-day operations were remarkably successful, clouding a poor strategy and short-sighted management decisions – much of it born from constantly going from one crisis to another, and again targeted by its competitors who saw its vulnerabilities

Norwegian is still not an airline I believe can survive European short-haul. It’s too small, its finances too bizarre and its expensive concentration on long haul low-cost is sapping its ability to compete on the European short haul front. It will have to make up its mind what it wants to be.

There are two airline groups to watch. IAG – which with Vueling is already ahead of Eurowings in the low-cost market, it has Iberia, coming back from a devastating but reinvigorating transformation, British Airways, which despite declining standards seems to be going nowhere but up, and fast-growing Aer Lingus with its unique trans-Atlantic proposition and European routes, plus the new long haul low-cost LEVEL.

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WOW is crossing every line and pushing hard on the heels of competitors and stands to win big time with the right plan.

The other is of course the now already vast Lufthansa Group.  Think about what Lufthansa has sucked into its ownership already:

  • Lufthansa, Lufthansa Cargo, Swiss, Eurowings (long and short-haul low-cost, including Germanwings), Brussels Airlines, Austrian, Niki, AEW, Air Dolomiti, Lufthansa City Line (part of which was Augsburg Airways until a couple of years ago), Edelweiss, and 50% of AeroLogic and Sun Express.

On top of that it owns a very large business of airline and airport support companies:

  • LSG Sky Chefs, Lufthansa Consulting, Lufthansa Flight Training, Lufthansa Industry Solutions, Lufthansa Systems, Global Load Control and far from least, Lufthansa Technik, which is one of the worlds most wide-spread and multi-faceted aircraft servicing companies.

You can compare any of the others, AF-KLM or IAG, and not one of them reaches this scale of operations.

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Dominance personified, Delta has many tentacles spread around the world, is an efficient business and maintains practical, incisive strategies to ensure it’s always on top.

Meanwhile, Delta is buying its way into European operators through stategic share holdings, which prop up its Skyteam partnerships with AF-KLM and its ownership of boutique airline Virgin Atlantic, as well as tie it to China Southern even more closely.

Hainan Airlines parent HNA Group is another vast company, gobbling up Chinese airlines the government considers vulnerable and investing in airports, infrastructure and European airlines from TAP Portugal to Cargolux and a sizeable stake in Virgin Australia.

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Hainan Airlines Group is a silent, deadly predator, swallowing up the weak and working its way into every airport and airline with a need for capital. Its a remarkable business, a front for China’s economic plans abroad and its growth has been relentless.

The loss of Monarch on October 2nd overshadowed a less notable but in many ways significant change to nother British brand. Thomson vanished from aircraft liveries and the high street retail space and became TUI. Another example of relentless European airline consolidation.

Monarch was wiped out by foolish management decisions to try and compete on routes than had, in most cases, between four and nine other airlines flying the same city pair. That was simply unsustainable and its mind-boggling they didn’t see that.

The change in fortunes when it was forced to leave its Tunisian, Turkish and Egyptian routes because of global events, was well-managed. Its passenger numbers rose 14%. Despite that, its income per passeneger kilometer collapsed because of the horrendous competitive price pressures from so many airlines on the same routes.

In many ways Monarch and AirBerlin fall into the same category. Both were single nation small airlines, both had failed to recognise the type of competition they faced, both had failed to truly internationalize inside the EU, and both had limited access to the vast amounts of capital required to finance expansion up to a scale that could be sustained long-term.

SAS is still struggling to stay independent in Scandinavia. Its long-term prognosis is it will be OK until another geopolitical issue or economic downturn affect flights. Lufthansa will pounce as fast as lightning to shore up a key StarAlliance member and SAS shareholders will jump at the chance.

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If Lufthansa gets Alitalia long haul operations it’s exit from Skyteam is all but assured, weakening that alliance as it moves to StarAlliance – which will frankly do it the world of good as it’ll benefit from a huge Lufthansa Group feeder network.

If Lufthansa adds Alitalia to its portfolio – and you can almost see the Italian government praying for it, Lufthasa will bring stability to that airline and its profitable long haul arm. Alitalia is everything that was wrong with old state airlines, and it’s demise has humiliated share holder Etihad. So much so that there is now genuine interest in another round of consolidation – Emirates potentially operating with Etihad as a partner airline in the longer term, maybe even as a Virgin Atlantic style high-end boutique arm, has got to be an ideal fit. Either way, Etihad’s days are numbered as truly independent.

Everywhere we see new airline brands emerge, they are nearly always on the back of a major group parent. Even the far east has seen consolidation, though its been far more internalized. Take Cathay Pacific, in effect converting Dragon Air into a closely related sub-brand as Cathay Dragon, formalizing a form of consolidation essential to both airlines survival.

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Repositioning Dragon Air as Cathay Dragon, lowering Cathay Pacific’s offering and lifting Dragon’s, is all part of the group strategy. But will Qatar’s 10% buy in make it easier or more complicated?

Singapore Airlines has been busy making sure that it’s Scoot brand is survivable and sustained, while curbing its own operations and re-inventing its processes and management practice. Competition is driving it all.

While this will go on endlessly around the world – India and China have yet to experience it fully, and Africa is a long way behind, South America already has. LATAM, once it irons out its many issues, will I feel sure, absorb at least one other national airline in the next 5 to 10 years – I’m betting on Argentina.

The West European market is now almost saturated, Eastern Europe is still growing but despite airlines like Wizz, giants like RyanAir and easyJet, never mind Eurowings, will slowly walk it out of the door as the years go by. Within a decade airlines like Wizz will be history unless they land knock out blow after knock out blow on the opposition.

In Russia smaller airlines like Vim are vanishing, as regional markets, the rampant corruption of a politicised oligarchy and a byzantine bureaucracy,  ensure that friends and family of those who support certain individuals get one over on their business rivals.

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Russian airlines like VIM aren’t immune but this is Russia and nothing is what it looks like on the surface.

Yet there is some hope for diversification, airlines like Spain’s Plus Ultra are new but are they viable long-term? Their financial backing is limited. On the other hand Air Europa, also in Spain is still expanding, but it has the backing of a huge travel group, yet even that seems like it could be on shaky ground.  Vacuums in Cyprus and Greece were quickly filled with Aegean Airlines growth despite horrendous economic pain in the country from the vast national debt.

African airlines, Ethiopian, South African, even Rwanda Air, are either successful, rebuilding or planning to make an impact. Even Egyptair is looking at revitalising its national airline. But they all have one thing going for them. Virtually no competitor and governments unlikely to countenance one.

In Israel, the molly coddled Israeli Airlines is finally facing low-cost competition and many pundits think it just isn’t capable of dealing with it.

The survivor markets will be small to medium specialist airlines like Flybe and Wideroe, and very small regionals, like Logan Air and Darwin, who operate in unique positions, often on long thin routes that can’t sustain a competitor, and service routes subsidised by government to reach remote areas.

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Flybe is the epitome of a medium specialist regional carrier operating niche routes

The other venue for a massive fight is the North America trans-Atlantic. Low cost is being pioneered from Europe – airlines that cannot really make deeper inroads into the European “domestic” market are looking ever more closely at doing more. New airlines like Primera Air are about to carry the battle further. The market will explode, prices will tumble, and sooner or later one or more of them will go under as competition forces them out. Often enough he who strikes first strikes hardest and makes the most inroads to sustainability. WOW Air and Norwegian are well placed to fight that battle. Trans-Atlantic is fast becoming as normalised as an everyday destination as Europe is, especially for those states out of the EU, with a huge market like the UK about to join them.

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Primera Air is about to launch UK/France-US low-cost flights from key airports using the new A321neoLR. One of the airlines 737’s seen operating with Jet2.com

In conclusion, European consolidation will follow along the lines of the US. It’s inevitable, and Lufthansa is the winner. In the LCC market the war is going to get vicious. Expect more casualties. In the middle is you, the passenger. You’ll get a good deal as the wars rage, but as they calm down, in five years or so, expect less choice, higher fares and lower service levels. Unless you’re prepared to pay.

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