European airlines had mixed fortunes in 2017. Some rode on the surge of low oil prices and improving economic growth and registered good financial results. Others had to face the inevitable and declared bankruptcy as a result of an unsustainable business model.
The transformation that the European airline’s industry went through in the last 15 years is nothing short of impressive. In 2012 low-cost carriers had a nine per cent share of the European market. In 2017 this rose to 43 per cent. Many analysts believe this trend is irreversible.
Legacy airlines face a formidable challenge that some of them are addressing adequately thanks to the strong presence they have in the market. Gone are the days when legacy airlines tried to compete by offering more perks to travellers. The low-cost model is now universally accepted as an essential requirement for all carriers that provide short-haul services.
But is the low-cost model the silver bullet that will save any European airline in trouble?
Last year three European airlines declared bankruptcy. Alitalia, Italy’s national carrier, could never appease its workforce, improve productivity and flexibility, and justify its existence by not depending on State aid. Its future remains uncertain as the EU competition authorities will not succumb to yet more pressure from the Italian government to grant State aid to the airline.
Air Berlin tried to tackle the big boys in the market including Lufthansa. Although relatively well managed and with an efficient, low-cost model it had to exit the market. Lufthansa is likely to take on the Air Berlin fleet as well as absorb the capacity that this airline is now giving up.
Monarch, the UK’s fifth biggest airline, was a niche low-cost airline specialising in providing services to Spain and North Africa. As more low-cost carriers increased capacity to Spain, Monarch could no longer cope with the excess capacity.
The European short-haul airline industry is today dominated by price sensitivity. All that interests customers is safety, low fares, and ease of travel. All carriers, whether they are State-owned or private, know that they are in the industry for the long term and do not give up their capacity easily.
But market forces often have a self-correcting mechanism to address the excess capacity. Jonathan Wober, an aviation analyst at research organisation CAPA Centre for Aviation, makes an excellent analysis of the industry today.
“Some airlines have kept going longer than would have and some have put more capacity in as a result of cheaper fuel. But there is a self-correcting mechanism here – the capacity glut to plummeting unit revenues, and those that don’t have the cost base to survive plummeting unit revenues eventually do suffer and disappear,” he wrote.
The days of low fuel costs may soon be over. As fuel prices increase, the pressure will increase on airlines struggling to survive. The European airline’s industry suffers from fragmentation and overcapacity.
In a recent article in the Financial Times, transport correspondent Tanya Powley wrote that the biggest six airlines in the US provide 90 per cent of all US domestic capacity, while in contrast, the biggest six European carriers provide just 43 per cent of capacity.
Most analysts predict that in the next decade successful low-cost airlines like Ryanair, EasyJet and Wizz Air will continue to capture market share from legacy airlines and weaker low-cost carriers. The industry will thus consolidate and weed out the weaker operators.
Low-cost business models will continue to be the winners, and legacy airlines that have no profitable long-haul services will struggle. An airline like Lufthansa will do what it takes to consolidate their strength in the market.
Existing low-cost airlines like Ryanair will continue to grow even if they have some severe existential challenges. The Irish carrier, for instance, needs to change the way it manages its human resources and customer relations if it is to maintain its dominance in the European market.
There will also be some shining rising stars like Wizz Air. This airline was born from the ashes of Malev, Hungary’s failed national airline. Budapest-based Wizz Air has just bought 146 new Airbus A320 aircraft. It is gaining market share continually thanks to its ambitious plan to increase clout in the market. The rise of Wizz Air is not just a threat to Ryanair and EasyJet but also to legacy airlines.
Substantial financial resources, high frequency of flights, extensive network, as well as low-cost operations are all essential competitive resources for sustainable competitiveness in the airlines industry.
johncassarwhite@yahoo.com