Airline Weekly - November 14, 2005
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Airline Weekly - November 14, 2005

Stuck In Europe’s Middle: Clouds Darken for Many of Europe’s Mid-Sized Legacy Carriers

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Cover Story

Stuck In Europe’s Middle: Clouds Darken for Many of Europe’s Mid-Sized Legacy Carriers

Europe, with its grand traditions and cultures, likes to celebrate its past. But preserving it can be difficult in a fast-changing world. Just as McDonalds appears near the bistros on the Champs-Elysees, and Chinese-made shoes replace Italian ones, new airlines are challenging the old, forcing some storied national symbols into fights for survival.

No country felt this more than Belgium, whose national airline Sabena was forced to liquidate after nearly 80 years of carrying the nation’s flag throughout the world. Switzerland nearly experienced a similar liquidation of its own national giant Swissair. But politicians, workers and business leaders, not constrained by European Union laws against corporate bailouts—Switzerland is not a member of the E.U.—restructured the company and kept it alive.

Both Sabena and Swissair are prime examples of the most vulnerable sector of Europe’s still-nationally-fractured airline industry. Mid-sized legacy carriers, often linked to their home governments, have become dangerously exposed to two major forces now characterizing Europe’s competitive landscape. One is the consolidation of market power among the continent’s three biggest airlines—Air France/ KLM, British Airways and Lufthansa. The other is the domination of shorthaul routes by low-cost carriers that are still achieving double-digit annual revenue growth more than eight years after the full deregulation of the continent’s skies.

The first trend means that Paris, London and Frankfurt—and to a lesser extent Amsterdam and Munich—are now Europe’s dominant hubs, offering the most destinations throughout the world as part of a profitable, and therefore sustainable, route network. Smaller cities like Brussels and Zurich simply do not have the local populations to compete with them.

Nevertheless, worldwide longhaul demand is so strong at the moment that smaller hubs are managing to squeeze some profits from their intercontinental flights, for now anyway. It is the second trend, however—the rise of low-cost carriers within Europe—that has left nearly every mid-sized legacy carrier bleeding with shorthaul losses.

So what are the options for these carriers caught in the middle? For Swissair—reinvented with the name Swiss International Air Lines—not even an infusion of new money and significant cost cutting could prevent it from posting... (364 of 1459 words)

Also Inside this Issue:

In case you didn’t notice, the price of oil dropped below $58 a barrel last week, its lowest point since July. Jet fuel prices, which also incorporate refining and transportation costs, are also well below post-hurricane levels.

While it is too soon to declare an end to the sustained price increases witnessed this year, the recent drop has elicited murmurs of industry optimism not heard for quite some time. With yields rising as fast as they are, particularly in U.S. domestic and intercontinental markets, a reasonable fuel price would go a long way toward changing the fortunes of even the sickest of airlines.

But hopes for good fortune aside, airlines still face the realities of a marketplace compartmentalized by nation rather than globalized in structure. That is certainly true in Europe, as discussed in this week’s cover article.

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