Airline Weekly - December 3, 2012
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Airline Weekly - December 3, 2012

The E.U. Flu: Europe’s airline business, healthy LCCs aside, is sick. Are cuts and consolidation the cure?

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Cover Story

The E.U. Flu: Europe’s airline business, healthy LCCs aside, is sick. Are cuts and consolidation the cure?

The U.S. airline market needed three giant mergers, newly discovered ancillary revenues, tight cost control and a whole lot of capacity cutting to induce an unprecedented state of stable, post-recession profitability. Can the same be achieved in Europe?

To be sure, the economic conditions are harsher, with Europe’s major economies stagnant at best and still shrinking at worst. Demographic trends aren’t much better, with population in the eurozone area similarly stagnant. And political conditions are harsher too, with punishing taxation, greater pressures to control emissions, more punitive passenger rights legislation, sentimental attachments to flag carriers, unpredictable competition regulators, highly inefficient air traffic control, night flight bans, imbalanced political support for railways, insufficient ground handling competition, powerful airports and labor unions constantly raising charges and staging strikes, respectively, and large pools of interest groups that seem more interested in preserving a comfortable but fading past than embracing an uncertain but promising future. One example of that last point: numerous and repeated instances of governments bailing out their dying national airlines.

At the same time, even strong European carriers are increasingly exposed to the remarkable rise of Turkish Airlines and the Gulf’s Big Three. Unlike America’s global carriers, Europe’s can’t as readily charge for ancillary services because routes tend to be very long, such that competitive pressures make it impossible to—say—charge for meals and all checked bags. And anyway, fees, on a percentage basis, just don’t increase revenues as much on longhaul flights as they do on shorthaul: a €20 bag fee, even if an airline could get away with charging it, just wouldn’t matter as much on top of a €1,000 fare as it would on top of a €250 one. Other routes—most intra-European ones—are very short, so fewer passengers are interested in buying meals, paying for entertainment or checking bags. Europe simply has nothing like America’s dense, big-revenue transcontinental routes, which are long enough for people to get hungry and demand more amenities and yet free of competition from carriers outside the region. In addition, European markets are more seasonal than those in the U.S., making it more challenging to manage assets, personnel and capacity.

This year, European airlines are also dealing with the toxic effect of a stronger U.S. dollar, which causes already high fuel costs to become even more expensive. As a result, aggregate traffic volumes throughout Europe... (411 of 1,644 words)

Also Inside this Issue:

As airlines enter the final month of a difficult 2012, attention turns to what 2013 will bring. But 2012 still has a few weeks left, and it could end with a giant bang, according to information gathered by London’s Sunday Times and corroborated by other media. Delta and Air France/KLM apparently want to team up to buy control of Virgin Atlantic, with Delta buying the 49% share currently held by Singapore Airlines.

A less constructive event that could occur before year’s end is another Christmastime Iberia strike. Workers are unsurprisingly unhappy about their company’s latest restructuring plan.

Looking beyond the immediate horizon, Air Canada sees a future in longhaul international flying with new jets, a new low-cost unit and new routes, the latest being Seoul and Istanbul from Toronto.

For Malaysia Airlines, visions of the future are clouded by extreme competition—fighting against AirAsia is like fighting against Napoleon at his peak. So like Napoleon’s rivals, Malaysia Airlines is joining an alliance. Will oneworld help turn things around, or is it too little, too late?

Coalescing against a common enemy didn’t work for the many airlines battling Emirates, perhaps the true Napoleon of the airline industry. So Qantas, as announced earlier this year, is taking a different approach, hoping to partner with its longtime foe. But an insurgent group of Qantas shareholders, which includes some former Qantas executives, isn’t happy.

In Scandinavia, where SAS came within a whisker of meeting its Waterloo, rival Finnair hopes to ensure its future with an Asian strategy that now includes flights to Vietnam.

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