Air Berlin won't be the last European airline domino to fall
Low margins and fierce competition to force more consolidation
Michael O’Leary, the feisty chief executive of Ryanair, reckons that five years from now there will be just five European airlines. Ryanair of course will be one of them, he confidently predicts, as will his big rival EasyJet. The other three candidates in the survival stakes are Lufthansa, Air France-KLM and IAG.
The others will disappear, either merged into one of the bigger groups or killed off by the increasingly ferocious competition currently gripping an industry that is cursed by too many seats and not enough passengers.
The low-cost German carrier Air Berlin, dogged by delays and cancellations that resulted in huge compensation costs, has just become the latest casualty, the second of the summer, after its major backer Etihad Airways, which owned 29.9 per cent, refused to continue supporting its losses. Etihad was also the major shareholder in Alitalia, another national flag-carrier which collapsed into administration. More carriers will follow before the consolidation of a traditionally fragmented industry where every country propped up its own – usually loss-making – national airline, is complete.
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National pride once required every European country to have its own airline. But not anymore. IAG now includes British Airways (itself a merger of BOAC and BEA), Aer Lingus and Iberia, once the fiercely independent state-owned airlines of three European nations. Air France-KLM is a merger of another two. Romania’s Tarom and Poland’s Lot, both of them bleeding state cash, have been restructured as their respective owners accept that hard economics outweigh national pride.
Even five European carriers may be too many in an industry which is fast changing. The low-cost carriers, which have changed the order dramatically, barely featured on the scene 20 years ago. Nor did the big Middle East airlines, Emirates Airlines, Etihad and Qatar Airways, who are eating into the long-haul market where margins are a good deal higher.
Consolidation is a world-wide phenomenon. The US, where commercial air travel basically began, has already gone through the massive restructuring that state pride and legacy delayed in Europe. Forbes recently calculated that in the 30 years leading up to the financial crisis of 2008/9, the US airline industry lost $52bn; in the 1980s alone, they lost more than they made in their entire history. It is extraordinary to think that an industry which has grown faster than any other over the past hundred years and which accounts for a substantial chunk of national budgets is also the biggest loss-maker of all time. The sobering fact is that Amazon, Apple or Google, which didn’t even exist when great airlines such as TWA and PanAm ruled the skies, are today individually worth more than the entire world’s airline industry. The US experience has been a painful one. Many of the airlines went through Chapter 11 bankruptcies before they could trim their costs to compete with the low-cost carriers. In 2005 the big wave of consolidation began when US Airways and American West got together, and sped up after the financial crisis when a nasty drop in travel threw up a glut of seats. United Airlines merged with Continental in 2010 and Southwest, the model for Ryanair, got together with AirTran Airways a year later.
Air Berlin didn’t make a penny in the last ten years of its life, which is not all that surprising when you look at the fares they were offering: €19 flights from Berlin to Majorca which everyone knew was just not sustainable. You can’t get to the airport for that.
Consolidation would have happened so much faster but for the low oil price which has made the profitable airlines even more profitable and kept the marginal airlines going long past their natural sell-by date. Many airline schedules maintained today could not be kept going on U$75 oil, let alone $100. Any tick-up in the oil price will result in another round of collapses.
Aviation history is full of heroic failures. Freddie Laker survived long enough to leave the lasting legacy of low-price trans-Atlantic flights from Britain to the US which were soon picked up in Europe. Even Donald Trump had his own airline for a time. Richard Branson managed, against considerable odds, to make a go of it after a fierce fight with British Airways, which employed every dirty trick in the book to put him out of business.
When the Irishman Tony Ryan started RyanAir in the 1980s, few gave him much of a chance. But he knew what he was doing, basing his model on Southwest airlines, which he shamelessly copied. His new airline, he decided, would fly just one plane, the workhorse Boeing 737, would have incredibly fast turn-round times (mostly 40 minutes), pay its pilots less than the national flag carriers did, and make passengers pay for every little frill, including food and drink.
He lived just long enough to see Michael O’Leary turn his dream into a brutal reality, starting by killing off poor old Aer Lingus which, like all the state airlines, operated on an entirely different cost structure. A similar legacy still rules across a number of European airlines. But not for much longer.
Updated: August 29, 2017 01:22 PM