US Consolidation
versus European Concentration May/Jun 2023

Consolidation has long been a topic in the airline industry — ever since deregulation kicked off 45 years ago.

In the domestic USA, consolidation may have finally taken place in the 2010s following the (mainly) organic growth of LCC archetype Southwest and a spate of large mergers of the large network carriers (each of which had been through Chapter 11 restructuring at least once). The last of these was American and US Airways (itself a result of a 2005 merger with America West) in 2015.

The effects of these combinations were to ease competition and remove excess capacity, resulting in the top five airlines by 2022 controlling 85% of the available seat capacity, up from 69% in 2002; and the industry had turned profitable — since 2013 (forgetting the trauma of the pandemic) as a whole it achieved the highest profit margins of any region in the world.

European aviation in contrast is deemed to be highly fragmented and conventional wisdom suggests a need of consolidation. But the European airline market, while similar in market size as a whole, is different from that of the domestic USA.

The population distribution is centralised: the areas of highest population density run in a crescent shape from London through Paris, Northern France and the Ruhr Valley in Germany to the Po Valley in Northern Italy (missing out some empty spaces in the Alps). In contrast the population concentration in the USA is heavily weighted to the East and West coasts with very little in the intervening 3,000 miles.

In consequence the interconnecting hubs in the centre of the country that make sense in the USA have no role in Europe. Network hubs in Europe are primarily for intercontinental connections, and mostly rely on strong O&D demand to large capital cities.

Importantly the EU is no federation, individual countries within it still have some some residual need for a “flag carrier”, whether or not there is a real commercial need. (Slovenia, whose former national carrier Adria Airways collapsed in 2019, is said to be looking to create a new flag carrier). And international routes are still influenced by ownership restrictions inherent in bilaterals.

Despite all this, there has been a substantial move towards concentration. The top three network legacy groups have been formed from a series of judicious mergers — all seemingly encouraged by the European Commission: the Air France-KLM merger “of equals” in 2004; Lufthansa’s opportunistic acquisitions of Swiss, Austrian and SN Brussels from 2005 in order to protect its tedescophone heartland; the creation of IAG in 2011 (the structure benefiting from the mistakes the other two majors had made) through the merger of British Airways and Iberia, and subsequent plug-in acquisitions of Vueling and Aer Lingus.

In 2002 the top five airlines (then all legacy network carriers) controlled 40% of the intra-European seat capacity (see graph). By 2022 the top five had 64% of total seats. The constituent parties have changed: the ULCC Ryanair has jumped over the Lufthansa Group into the top spot with a near 20% share, LCC easyJet has overtaken Air France-KLM with a 10% share; fast-growing runner-up Wizz Air would give the top six carriers a 70% share. Meanwhile erstwhile major players such as SAS and Alitalia are much smaller in actual terms.

IAG and Lufthansa are currently going through regulatory approval for their acquisitions respectively of Air Europe and Alitalia.

Portugal is reported to be about to put TAP up for sale (again) — see Aviation Strategy, May 2022, April 2015, and June 2011 — as a remedy for having bailed the carrier out during the pandemic. This should see strong interest from IAG, Lufthansa and Air France-KLM — TAP has a strong position on routes to Latin America, and particularly Brazil. But it will depend on the terms of the sale: Portugal has said it wants to keep a stake.

Likewise, The Azores has to find outside capital for its airline because it supported its carrier SATA Air Açores. That won’t make much difference: it is a tiny niche player with six Dash-8s in its fleet.

Further north SAS, half the size of its former self, is on the search for the investors to allow it to emerge from Chapter 11 bankruptcy.

It is notable that the recent deals have involved a significant overlap in routes between the acquirer and acquired. The Commission in Brussels in its reviews of airline mergers considers the competitive issues on a route-by-route, point-to-point basis. Where combined market shares are deemed to high it requires remedies, usually slot disposals, to new entrants. The beneficiaries are likely to be the LCCs: Ryanair, easyJet and Wizz.

Is this the way the European industry will continue to develop: the three large airline groups grow by selective opportunistic acquisition; the LCCs grow organically, helped by access to airports; the smaller, unwanted players fade into obscurity.