What if there were only 12 major airlines left?

We have recently seen that in view of a future crisis in the airline sector, Air France must restore its profitability if it does not want to emerge weakened and, in the best of cases, an easy prey for its competitors who would have better passed the winter.

But, precisely, who can be the big winners and losers of the crisis?

Are we heading for an air transport crisis?

Let’s take things in the right order. Before looking at the survivors, let’s ask ourselves if the probability of an upcoming crisis is so high, which may seem paradoxical in an industry that is experiencing continuous growth in traffic and when Airbus and Boeing order books are full!

However, this risk is major and we have already talked about it here. It’s not so much a question of demand as of profitable demand: if that’s not the only reason to worry, there is real overcapacity which is dragging prices down and leading airlines into a spiral where few can afford to play this game for long while waiting for better times. Add to that the need to finance heavy investments and rising oil prices and the picture is complete.

Yes, everything suggests that turbulence is coming and that a period of consolidation will follow, especially in Europe where it has not taken place and where competition is raging like nowhere else.

For Lufthansa only 12 major airlines will remain

It is in this context that Carsten Spohr, CEO of Lufthansa, recently put his foot down by announcing that there would soon be only 12 major airlines left.

Quote:

“The sector is evolving towards a dozen airlines operating globally on major international routes, in addition to smaller national or regional airlines […] Three in the United States, three in China, three in the Gulf and three in Europe“.

A statement that did not fail to elicit reactions such as “lack of vision” or “who does he think he is”.

At TravelGuys we would tend to agree with him. Not necessarily on the exact number but on the general trend.

He is not saying that there will only be 12 airlines left in the world, but 12 that will operate the major international routes alongside others with a more regional or continental scope. Of course, no one wants to see “their” national airline relegated to the rank of a simple regional player, but if we pay attention, this is what has been in the works for a long time.

A brief review of the situation

In the United States there is room for everyone

The United States has already experienced its consolidation. Today, between Delta, American Airlines and United, there is not much to worry about, especially since the American airlines have their anti-crisis weapon: the Chapter 11, which allows them to restructure and invest without the risk of their creditors as soon as the weather turns stormy.

On the other hand, only Delta seems today to want to actively participate in the consolidation outside of its domestic market by multiplying its shareholdings in its partners. Until going further?

South America and Africa out of the picture

Can we expect to see a South American player come into the game? None of them has the critical size to do so today and there is not much reason for that to change. Most of the airlines in the subcontinent are more oriented towards their domestic and continental markets and have little influence on intercontinental routes. The typical example of a player with a regional vocation.

The same thing and even worse for Africa, which today does not have any player likely to participate in the consolidation, if it survives the crisis at all. The long history of European control over international routes and the proximity of Gulf airlines is an almost definitive barrier to the growth of continental airlines if they manage to raise their quality standards and clean up their management.

Who will join Emirates in the Gulf?

As far as the Gulf airlines are concerned, it seems obvious that Emirates is here to stay, even if we think that, like its neighbors Qatar and Etihad, it has finished eating its white bread at least for a while.

And who else?

Qatar seems to us to be a natural candidate whose good performance continues to surprise as the airline seems to swim in a sea of adversity.

And then? Mentioning Etihad would be the easy way out and we won’t succumb to it. Etihad is in bad shape, there are many signs that its service is deteriorating and whatever its chairman says, we are waiting for the day Emirates will get its hands on it.

So who is it? The very nice and ambitious Oman Air? We would like it as their product is of high quality but they will have a problem of critical size to establish themselves as a global player when their network is mainly regional or turned towards Asia. Saudia ? The same remark with the addition of geopolitical questions that are real obstacles to its deployment even if it makes the necessary investments.

So we only see two major players in the region, perhaps joined by Oman Air but not immediately.

Breakage in Asia?

Along with Europe, this is the most interesting case given the multiplicity of players. Who can imagine Japan Airlines, ANA, Cathay or Thai disappearing tomorrow? No one. Although…

Despite its very good service, Malaysia has never recovered from the dark period it experienced a few years ago and has greatly reduced both its size and its ambitions. And her government does not seem inclined to keep it on life support.

Thai is not doing well either but will its government let its national airline go under? The same question applies to Catay, whose finances are not in good shape and which is also suffering from the recent tensions between China and Hong Kong. Here again we can say that the symbolic nature of the airline can push the public authorities to do something, but we are not sure that the Chinese and Hong Kong leaders have the same vision of this “something”. In the meantime Cathay is doing very badly today.

Vietnam Airlines is developing well but not enough to play in the big league. Garuda Indonesia will always be a regional player, especially when we see their permanent strategy reversals on the service to Europe without success (and it’s a pity given the quality of the product).

Thai, Asiana and Japan Airlines are too small today. There are doubts about Korean’s medium-term health.

You can bet on Singapore Airlines and ANA. And next to that, we would bet a small coin on Japan Airlines and a joker on Cathay Pacific.

What about India ? As a country whose aviation industry is in a state of disaster, we don’t see it playing a major role in the future.

Suspense in China?

A priori in China, the game is already played: Air China, China Eastern and China Southern. That’s all.

We would have liked to discuss the capacity of the very good and promising Hainan Airlines to move the lines but China is China and the airline industry will anyway be organized in the way that the government will find most relevant to play a major role in the future without the market having a real role in it.

What about Oceania?

Mr. Spohr does not see a player from the region playing a major role in the future and this surprises us. Okay, Air New Zealand is a bit too regional, but Qantas?

But finally the two airlines are in the same case: their location prevents them from being part of a hub logic other than regional. They will continue to do their business in their corner with a few very long-haul flights but cannot claim massive growth in this sector.

And finally Europe

You don’t have to be a psychic to tell that we know two fairly obvious “suspects”. But in Europe, rather than thinking in terms of airlines, it is better to think in terms of groups.

IAG (British Airways, Iberia, Aer Lingus, Vueling, Level, OpenSkies) for starters, which is in good health, and Lufthansa Group (Lufthansa, Swiss, Austrian, Brussels Airlines, Eurowings), despite its recent poor results, have the profile to continue to play a major role on major international routes in the future.

Then? Air France-KLM. This would be the most logical provided that the group’s low profitability does not cause it to emerge from the crisis bereft.

Oh no, I almost forgot Turkish Airlines, which has just acquired an airport capable of supporting massive growth and which is already the airline that serves the most destinations in the world with, what’s more, an ideal positioning between Europe and Asia. If there are only three players left in Europe, as Spohr says, then Turkish will be one of them. So we will hope for our national airline that this prediction is as reliable as a poll during an election period.

For the rest, the European players are already in the process of becoming predominantly regional players, so there is nothing new to expect unless a new group is formed as a result of consolidation. Unlikely but never say never.

By the way, IAG might not be a European carrier anymore in a near future, which is not neutral either.

And the low-cost in all this?

They are conspicuous by their absence and I am sure that some will be offended by this. But today nothing proves that the long-haul low-cost model is viable, even if after announcing that it would abandon its plans in this area, Lufthansa has finally backed down…but for how long?

I would have bet on Norwegian in my list but despite recent positive signals (help from a sovereign wealth fund, refocusing on its core business) the horizon still seems a bit too cloudy.

The truth is that it is difficult to predict how they will get through the crisis.

Will they emerge stronger because of their greater resilience?

Will they emerge weakened because their model is one that feeds growth through growth? Moreover, we can see that they already seem to be the first to have difficulties.

Will they all suffer the same fate? There are low cost and low cost and some may be better equipped than others to get through the tough times.

On the other hand, in this logic of consolidation I remain convinced that the low-cost ones (at least the ones that will survive) have a role to play alongside the legacies. If everyone specializes in what they do best and most profitably, we will inevitably have to ask ourselves whether the best option for the major long-haul carriers is not to entrust the supply of their hubs to airlines like Easyjet….

Bottom line

As Pierre Dac used to say, “predictions are difficult, especially when they concern the future” and in a few years we may say that we were totally missing the point. But thinking about what a post-consolidation aerial landscape would look like is not uninteresting.

Photo : Planes at the airport by Kichigin via Shutterstock