Consolidation in the European sky: who will eat whom?

The European airline industry is in the midst of a consolidation phase and the coming months should see several takeovers finalized, some expected, others less so. A dynamic driven by the three majors of the sector, namely IAG, Lufthansa Group, and Air-France-KLM

But at this stage the least we can say is that there is a lot of confusion.

In this article:

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The inevitable consolidation of the European sky

Contrary to the USA where 3 majors dominate the sky following a consolidation movement, namely Delta Airlines, American Airlines and United, and where we can think that the situation is stabilized at least for a while, everything remains to be done in Europe.

Indeed, if the merger of Air France and KLM gave rise to Air France-KLM, if the Lufthansa Group grew through the takeover of Swiss, Austrian and Brussels Airlines in trouble, and if British Airways and Iberia gave rise to IAG, there are still many medium-sized airlines on the market attacked by the low cost carriers from below and not big enough to get out of it by the top by going on the field of the majors.

More generally speaking, with downward pressure on prices and a market that does not have infinite growth, there would be casualties.

This movement seemed inevitable even before COVID. At the time, Carsten Spohr, CEO of Lufthansa, said that there would only be 12 major airlines left in the world, 3 per continent, and the Lufthansa Group was embarking on a policy to increase its margins in order to finance possible acquisitions.

For its part, Air France-KLM announced at the end of 2019 that it wanted to participate in the consolidation of the industry.

COVID put a stop to this momentum, but the deadline was only postponed. Of course the context is different with rising costs and prices but the basic data has not changed or even increased. The majors have come out of the crisis in fairly good shape, while for the others the return to profits has been delayed and they have emerged even more weakened in comparison.

The context has therefore never been so favorable for takeovers.

IAG and Air Europa: it’s a long way to go but it will happen

At the end of 2019 we announced the acquisition of Air Europa by IAG. Since then COVID has postponed the finalization of the operation, it was even believed abandoned when the group paid a penalty to the Spanish airline.

In the end, IAG announced that the takeover would go ahead but that it would take time, with the forfeit being converted into a contribution.

ITA joins Air France-KLM unless…

The takeover of Air Italia and then ITA has been a soap opera that has kept us busy since 2017. A host of takeover projects involving Air France-KLM, Lufthansa, Delta and easyJet were presented and then withdrawn, amended and rejected until the historic Italian airline filed for bankruptcy and was resurrected under the name ITA.

In the end, Air France-KLM won. Well, almost.

Almost because the Franco-Dutch group is part of a consortium led by the investment fund Certares Management and does not intend to invest in ITA for the moment. The reason? The group has not repaid its state aid linked to COVID and the European authorities prohibit it from taking more than 10% of the capital of another airline for the moment. As things stand, the relationship between Air France-KLM and ITA will only be commercial.

Secondly, because the consortium was chosen to enter into an exclusive negotiation phase for a limited period of time, which has just come to an end. We don’t know what to think at this point.

Has the new Italian government decided not to disengage from ITA? This was a risk considered from the beginning.

Has he decided to back out and accept Lufthansa’s offer, which is a better deal even if it will give the Italian state less weight in the airline?

Is it a simple setback?

We will see, even if we think that the concessions made in terms of governance made this acquisition a very risky operation.

The battle for TAP begins

We announced a short while ago that TAP was for sale and that once again we were going to see a battle between Air France-KLM and Lufthansa.

Lufthansa is the logical favorite, as TAP is a member of the Star Alliance, but we have seen in the ITA case that rationality does not always prevail.

And then we wonder what is Air France-KLM’s strategy on the subject. The group will not be able to take more than 10% of the capital unless, once again, it is backed by partners who would support the bulk of the offer. It was also said that a less than 10% stake would be considered, but what interest in an airline member of a competing alliance? It is hard to see a historical partner of Lufthansa doing a codeshare with a Skyteam airline…

Unless a third party settles the matter?

IAG eyes easyJet and… TAP

This third party could be IAG (British Airways, Iberia, Vueling, Aer Lingus…) which has said it is ready to participate in market consolidation. And it looks at TAP with interest, which would give it a quasi-monopolistic position on the Iberian Peninsula.

But IAG is also looking at easyJet, which is not in great shape at the moment and whose results are struggling to become positive again, with a sharply falling valuation. A choice that would make sense: it’s not the first time we’ve said that easyJet is an ideal partner to feed the hubs of the majors and, in addition, the airline operates many intra-European routes.

All airlines are for sale

To continue the tour of opportunities, let’s say that, to be honest, all medium-sized European airlines are potentially for sale, provided that a major one pays the price. Some are in a more fragile state than others, for some the choice is made and others not but potentially anything can happen.

From SAS to Croatia Airlines through Czech Airlines, Tarom and other LOT, there is no lack of possibilities and what is unlikely today can happen tomorrow.

Secondly, history shows that alliances often prevail in this type of operation, which seems to work in Lufthansa’s favor given the omnipresence of Star Alliance on the continent.

Another factor to take into account: Lufthansa is less indebted than its competitors and Air France-KLM still has to not only pay back its COVID subsidies but also recapitalize itself before it can have more assertive ambitions.

Bottom line

IAG, Lufthansa Group and Air-France KLM are ready to lead the consolidation of the European sky. But today they do not all have the same investment capacity and only two opportunities officially exist.

Image : planes at airport by Ekaterina Pokrovsky via shutterstock

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.
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