LONDON – Prior to the Covid-19 pandemic, the European airline market looked to be consolidating, with large airline groups dominating in the form of IAG, Lufthansa, Air France/KLM, Ryanair, and Easyjet.
Collectively these groups held just over 50% of the European market in 2019 (Chammem, 2020). And this was before the collapse of carriers such as Thomas Cook, Flybe and Germania.
Whilst significant, this pales into comparison to the US market, which through a series of mergers over the last decade, is home to four of the largest airlines (American, United, Delta and Southwest) that together hold over 66% of the US market (Goldstein, 2020).
However, Covid-19 has brought this consolidation trend to a halt, as all but Ryanair have had to take on significant debt in order to retain liquidity. Most European flag carriers – large and small – have relied on government bailouts to stay afloat.
By the end of 2020, it was estimated that industry support had amounted to €24 billion (Flight Global 2020).
With merger & acquisition activity off the table for the foreseeable future as a condition of some of the bailouts, and the industry’s big players tied up with their own challenges, some of Europe’s smaller flag carriers are re-examining their strategies to survive.
Setting up for Growth: Air Baltic
Despite shutting down for 62 days, Air Baltic has emerged from its crisis by retiring its Boeing 737 Classics and Dash-8 turboprops (CAPA 2020).
It is left with a fleet of Airbus A220s, an aircraft that with its combination of flexibility, seat capacity, fuel efficiency and range, is ideally suited to flying in an uncertain environment (Kamoun, 2020).
In addition, its network is entirely short haul – likely to be the first segment of traffic to return. Despite its dominant position at its hub in Riga, there are plenty of growth opportunities for Air Baltic in neighbouring Lithuania and Estonia.
Geographically, the Baltic states are primed for air travel, emphasised by their lack of a high-speed rail network across the region. Whilst Air Baltic has competition from low cost carriers, it looks well placed for the future.
This is in no small part to its leadership, particularly that of its CEO Martin Gauss, who was widely respected for his leadership helming a ‘rare example of a small, state-owned airline thriving in Europe’ prior to COVID (Harper, 2020).
His management style of leading by example was evident when he completed pilot training on the Airbus A220 (the first airline CEO to do so) (AviationPros, 2020). Many analysts would put its bets on the carrier to shake off its government shareholding, along with a rekindling of its pre-Covid plans to IPO.
Exploring a New Network Strategy: Finnair, TAP Portugal
Had things turned out differently in 2015, Finnair might have been a part of IAG today (Travelling for Miles, 2015). But when this did not materialise, Finnair focused instead on building out its network.
Prior to Covid-19, it developed a particular long haul niche, flying to Chinese cities that had limited non-stop flights to Europe including Chongqing, Nanjing, Guangzhou and Osaka.
Finnair benefitted from its geographical location – on the flight path between Europe and China – as well as its long-held right to fly through Russian airspace. With an easy transit process in Helsinki, Finnair had built up substantial transfer traffic.
Sadly, Covid-19 decimated this strategy. Furthermore, US-China trade tensions impacted travel to China and could do so well beyond the end of this pandemic. With long haul and business traffic expected to be the last segments to recover, the rebuilding process could be onerous.
At the same time, Finnair will need to cope with Norwegian’s renewed focus on the Nordics, potentially putting its regional routes under pricing pressure. It is quite likely that the Finnair route network will be forced to evolve as a result; expect to see leisure routes become a much bigger part of its long haul network as well as regional routes connecting into the long haul network at Helsinki.
And since Finnair converted two Airbus A330s to a cargo configuration in the early days of the pandemic (Flight Chic, 2020), I would expect to see an increase in the number of planes flying cargo.
Another airline that has held a particular niche on its long haul network is TAP Portugal. Its geographical location as well as its colonial ties gave it the biggest network of any European carrier into Brazil, flying to cities such as Belo Horizonte, Recife and Fortaleza.
TAP was also well positioned from a fleet perspective, having brought into service nineteen Airbus A330-900s and sixteen Airbus A321-Neos prior to Covid (Airfleets.net 2021). However, like Finnair, its network will likely change drastically to help it survive.
A key differentiator for TAP is they are likely to have a larger portion of visiting friends and relatives (VFR) due to their ability to fly long haul with narrow-bodies. Another difference is the type of government support they have received.
With 50% ownership prior to the pandemic, the Portuguese government has taken a controlling stake of the airline, buying out serial entrepreneur David Neelman to hold 72.5% (Flight Global 2020).
Whilst any airline would be loath to lose the experience of an industry figure such as Neeleman, this support mechanism will give TAP the breathing space it will need to reconfigure its network.
The impact of this acquisition became quickly apparent when the government announced TAP to be in a ‘difficult economic situation’, allowing it to renegotiate its labour agreements (CH Aviation 2021).
The future of TAP may even include point-to-point leisure flying beyond Lisbon – perhaps to destinations like Madeira and the Algarve. It is expected that the airline will focus more heavily on Lisbon as a hub for connecting VFR traffic; keep an eye out for Portugal stopover advertising!
In addition to route changes, we would expect to see TAP develop its network of partnerships. Whilst TAP and the Portuguese government may continue to covet Lufthansa as a shareholder, given their challenges the industry doesn’t expect to see this materialise in the near future.
However, the government has expressed interest in engineering an alliance with fellow Portuguese carrier Euro-Atlantic (CH Aviation, 2021). This move would create more capacity with some network overlap and could be really beneficial to the long term prospects of TAP.
Even if a rumoured partnership with Azul in Brazil sees the light of the day, TAP is likely to see a slow recovery and a sustained period of government ownership.
New Entrant Threat: SAS & Aegean
Nothing stands still in the airline industry. Even in a pandemic there are signs of new entrants filling a gap in the market. Norway is currently a good example of this.
With both SAS and Norwegian struggling, Wizz has moved in to start domestic flights while a well-funded start-up with experienced leadership is taking shape in the form of Flyr.
At the same time, Norwegian has refocused its strategy to focus on short haul, dropping its long haul arm. All of this creates huge problems for SAS. Whilst it has reduced its overhead following near-bankruptcy in 2012, it is still unable to compete with the likes of Wizz on a cost basis.
This means that SAS will need to focus even more heavily on network flying, for which it will need long haul routes. These routes may take a while to become revenue positive, even if they are able to utilise narrow-body aircraft. Unfortunately, SAS will also have to change its CEO after incumbent Rickard Gustafson resigned in January.
A perfect storm of uncertainty surrounds SAS and with a potentially resurging Norwegian snapping at its heels, the airline could be in for a rocky few years. Expect to see route rationalisation in favour of frequency increases, along with plans to replace its mid-size fleet put on indefinite hold.
It wouldn’t be surprising to see SAS make bigger use of its Irish subsidiary, typically used for registering aircraft and employing crew on a cheaper basis with a saving potential of up to 35% (Sumers, 2017).
It wouldn’t it be a surprise to see SAS focus on developing its regional operations, including a potential partnership with the struggling Swedish regional carrier BRA to grow domestic Swedish routes.
This strategy would remove a competitor from the market as well as allow SAS to decrease the amount of wet leasing of aircraft from operators such as Cityjet thus reducing costs (CH Aviation, 2021).
If successful, the concept could be extended elsewhere – perhaps to Norway where co-operation with Norwegian regional carrier Wideroe may be more attractive than before. Despite its best efforts, SAS may require further government support in the near future.
Meanwhile in Greece, Aegean is also threatened by competition. Sky Express is undergoing a shift from turboprop aircraft to new Airbus A320 Neo jets which have been deployed on domestic routes and shortly international routes.
With Sky Express looking to compete with Aegean on trunk international routes such as Athens to Larnaca and Paris Charles De Gaulle (Anna.Aero, 2021), Aegean is likely to find itself under pricing pressure.
Perhaps with that in mind, it has already refocused on a market it had previously neglected: international flights from the Greek islands (Anna.Aero 2020). This approach should generate additional revenue as passengers look for a holiday as soon as the pandemic begins to ease.
That said, it would also bring Aegean firmly into competition with low cost carriers such as Ryanair and Easyjet. With many of these firmly established (and Aegean unlikely to compete on cost), the airline may need government support to make its new strategy successful.
Expect to see continued focus on these leisure routes and increased holiday packages, as well as potential interlining and codeshares on routes where Aegean flies into other Star Alliance hubs (e.g. Vienna and Warsaw.)
Reboot & Rebuild: LOT, Icelandair
Fellow Star Alliance carrier, LOT, is no stranger to having to rebuild. In 2012, it needed a government loan to avoid bankruptcy. Whilst it is now the subject of another government bailout, it was on a healthy track pre-Covid having doubled its operation since 2016 (Aviationweek.com, 2021).
LOT had focused on building its long haul network with its Dreamliners, opening up such routes as Krakow – Chicago. It had also started expanding beyond Poland to Hungary, taking advantage of the bankruptcy of Malev in 2012 to open routes to Seoul.
Whilst this route has resumed, there is no expectation of any additional routes to follow until LOT is able to repay its government loan; politically, the government will not want to be associated with an investment that may not affect Poland.
This is a shame as the potential for a Central European airline concentrated on Poland, Hungary, Slovakia and Czech Republic is significant, particularly with Czech Airlines taking its only long-haul plane out of its fleet last year (CAPA, 2020).
LOT’s regional network is likely to change quite significantly as it exits its turboprop fleet over the course of 2021 (CH Aviation, 2021) having sold its 49% share in regional carrier XFly to Nordica (Orban 2020).
Whilst LOT will no doubt want to continue regional flights to drive traffic to its long haul routes via Warsaw, the frequency of many of these flights is likely to reduce post-Covid and, given the fleet changes, some up-gauging is likely.
Pre-Covid LOT had planned to acquire the German leisure carrier, Condor. Whilst this is likely still an attractive target for LOT, until the government bailout is fully repaid any acquisition is likely to fall foul of EU State Aid rules. Thus, there is likely to be a focus on rebuilding the network out of Warsaw and Krakow for the foreseeable future.
Icelandair was in an interesting position pre-Covid. Its aggressive, if not short-lived, competitor WOW Air had already collapsed giving Icelandair an opportunity to grow market share (WOW had expanded at 28% in 2018 (CAPA, 2018)).
The fundamentals driving Icelandair’s expansion over the previous decade were two-fold: 1) Increased leisure traffic flying to the US via its Reykjavik hub, and 2) the tourism boom in Iceland.
The first part of this plan is likely to recover quickly, but with demand reduced and excess capacity, its ability to undercut non-stop transatlantic carriers could be limited.
This could force Iceland and its government partner to drive inbound demand to support Icelandair’s recovery. Although there are concerns regarding over-tourism, Iceland will likely aggressively market itself with holiday packages as a layover destination for the next couple of years.
Time to Confront Reality: Alitalia
Where do you begin with the story of Alitalia? If this was any other airline in any other country, it would have collapsed long before the pandemic. Yet the Italian flag carrier still stands and, following a failed effort to attract investment, the government has recently nationalised it, creating a new company with the working name ITA (Italia Transporto).
Ironically, this may bring some badly-needed resizing with plans to reduce the fleet by 50% as well as the number of employees (Aviation Pros 2020).
The airline has steadily lost market share over the past decade and by the end of last year, Ryanair had overtaken Alitalia in domestic seat capacity (Anker Report 2021).
To survive, it needs to ruthlessly review its route network. Consolidation to either Malpensa or Linate airport in Milan, as opposed to both, is likely on the cards, in addition to a focus on a few select long haul markets (e.g. US).
If the government is able to overcome union opposition and implement a realistic business plan, we would expect to see further withdrawal from the domestic market and instead look for codeshare partners.
Nevertheless, Alitalia has a history of avoiding necessary cuts and with little alternative options for lessors to place aircraft, re-sizing could be avoided for a few years yet. That said, the European Commission may yet end up having a significant influence over the future of Alitalia.
Already investigating state aid support prior to Covid-19, it was recently revealed that dropping the Alitalia name will be a condition of approval of the plan to re-launch (CH Aviation, 2021).
The reason for this is well founded as the European Commission appears to suspect that the new company will simply be a new name on the existing Alitalia operation (F Landini, 2021).
This has the potential to delay or even stop the transaction as the European Commission appears to insist on the reduction of slots and ground handling process. If this materialises, then expect to see competitors moving in even more aggressively into the Italian market.
Any newly launched company will likely have an even smaller fleet and will focus primarily on connecting Italy to long haul destinations. Whilst no doubt this move will be unpopular in Rome, it could perhaps be the impetus needed to finally have a sustainable flag carrier operating in Italy.
Consolidation needed: The Balkans
Finally, looking at the Balkan airline market, one word screams out: consolidation. Having witnessed the demise of Adria and more recently Montenegro Airlines at the end of last year, Air Serbia and Air Croatia have both received government support to stay afloat.
In the case of Serbia, its government has injected additional capital and taken over most of the stake that was previously owned by Etihad (Kaminski-Morrow, 2021). Both governments have publicly committed to support of their flag carrier, considering it a strategic asset.
Given its political history, any consolidation in the region is unlikely, though both these airlines are struggling for scale. Whilst Air Serbia had a single long haul route to New York, it is unlikely to be able to scale to support a wider network strategy, particularly as its one long haul fleet was leased from the defunct Jet Airways.
Continued government support with further bailouts may feature in the future of both these carriers in addition to a likely continued search for an external partner to support airline strategy and development.
It would be remiss not to mention the other small flag carrier in Europe, Luxair, which has discussed a potential government bailout. Whilst all airlines have suffered, Luxair started to diversify prior to Covid, focusing on leisure traffic in addition to business traffic.
In addition, with its partial ownership of cargo airline, Cargolux, there is potential to rationalise the employee base across both operations (CH Aviation, 2021). Longer term, we would expect to see business travel return and Luxair is likely to keep most its current network and fleet intact.
In summary, a varied future awaits the smaller flag carriers of Europe. With mergers and acquisitions off the table, each will be forced to pursue their own path to recovery.
Whilst it will be fascinating to watch, and the hope is that each airline is able to take its place in the ecosystem and keep the thousands of workers employed while continuing to connect their countries to the rest of the world.
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