Airline Weekly - December 11, 2006
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Airline Weekly - December 11, 2006

An Urge to Merge in Europe?: Europe’s fractured airline industry is pondering the future of consolidation

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Cover Story

An Urge to Merge in Europe?: Europe’s fractured airline industry is pondering the future of consolidation

U.S. airlines aren’t the only ones weighing the merits of consolidation as an antidote to years of losses and instability. Their European counterparts have mergers and acquisitions on their minds as well.

That’s the case despite having collectively weathered the economic shocks of the past half decade with fewer bruises. The E.U.’s five largest legacy carriers all reported profits in 2005, and none encountered any of the near-death drama experienced by carriers like United, US Airways, Delta and Northwest. Nevertheless, Europe’s airline industry remains over-hubbed and littered with failing airlines.

For Europe’s Big Three—Air France/KLM, Lufthansa and British Airways—these are relatively good times. All are generating consistent if not spectacular profits, thanks in part to powerful global networks that only their large and well-positioned hubs could sustain. London, Paris, Frankfurt and Amsterdam are Europe’s four busiest airports, benefiting from large populations, strong business demand, plentiful tourism and relative proximity to markets throughout Africa, the Middle East, Russia, Asia and the Americas. These intercontinental markets butter the Big Three’s bread, leaving them less concerned with impossibly-competitive shorthaul markets than their American rivals. Other factors, too, like capacity constraints in London and Frankfurt and high costs in Paris, tame the competitive landscape.

For other European legacy carriers, however, the outlook is bleaker. SAS, Europe’s fourth largest carrier if revenues from all of its airline units are counted, managed a small profit last year after drilling down its costs. But that was hardly enough to reverse years of losses and cover for its lack of intercontinental opportunities. Its longhaul unit, in fact, is shrinking, while its domestic units—especially in Sweden and Spain—face relentless attack from low-cost carriers. Furthermore, its core Scandinavian markets have few natural or historical links with markets beyond Europe.

Iberia, meanwhile, however burdened by shorthaul pressure, always seems to find relief in Latin America, where Spain’s business, cultural and linguistic links give it a natural advantage. But it, too, worries about being over-dependent on one region, especially as competitive assaults by Ryanair, easyJet, Vueling and others grow more... (357 of 1429 words)

Also Inside this Issue:

Both the United States and the European Union accept the premise that freer airline competition across the Atlantic is a worthy pursuit. But the Americans insist on more access to congested London Heathrow, and the Europeans, presumably influenced by the U.K. government, insist on greater opportunities for their citizens and companies to own U.S. airlines. Last week, under pressure from congress and airlines not satisfied with their Heathrow prospects, the Bush administration scrapped its proposal to accommodate the E.U. Open skies, and the industry shakeup that it could bring, is now indefinitely on hold.

Labor, like government, is also influencing the evolution of the industry in a major way. American’s pilots, in an act they may ultimately regret, essentially sabotaged their company’s efforts to win flying rights to China, leaving archrival United, or perhaps Continental, as the most likely victors. And in Brazil, a work slowdown by air traffic controllers caused travel chaos and threatened to disrupt the economy.

Lufthansa became the first customer for the new B747-800, a potential nightmare plane for Airbus. jetBlue, meanwhile, is slowing growth plans again. Also this week, All Nippon and Asiana are tightening their relationship, Turkish Airlines is joining the Star Alliance and—in the world of distribution—Travelport is buying Worldspan. On the other hand, not a whole lot transpired with respect to the US Airways bid for Delta or the Italian government’s bid to manage its Alitalia headache.

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