Airlines: EU takes aim at takeovers

While consolidation of the European airline industry seems to be the inevitable direction of history, the EU (but not only the EU) seems intent on strictly checking any potential infringement of competition and thus protecting the consumer. The first deals targeted are Lufthansa/ITA and IAG/Air Europa, but the Air France-KLM/SAS case could also be involved in the future.

In 2019, Carsten Spohr, then Chairman of Lufthansa, said that there would soon be only 12 major airlines left in the world. The logic was simple: more and more airlines, not a problem of demand but of profitable demand, at some point medium-sized airlines will join forces with airlines with larger networks to try to develop synergies and regain profitability.

Quote:

“The sector is evolving towards a dozen or so airlines operating globally on the 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“.

Since then, COVID has come and gone: some airlines have come out even weaker than they went in, and the unexpected strength of the recovery did not change the situation in the slightest. Indeed, while they benefited from the recovery, the majors benefited more, and the gap between the two categories of airline has only widened, making the former easy prey whose shareholders are in a hurry to get rid of in favor of a solid partner who will be able to develop them before the next crisis arrives.

As a result, the concentration movement that had begun before COVID suddenly accelerated. But just when we thought we’d see European airlines regrouping around the three majors – IAG, Air France-KLM and Lufthansa Group – the competition authorities have suddenly decided to take a closer look at certain issues.

IAG and Air Europa: suspected monopoly in Iberian skies.

IAG’s takeover of Air Europa was announced before the COVID and has since been confirmed, even if the operation is proving slower and more laborious than expected.

You’d think that if the authorities had any reservations they’d have done so by now, but in fact they haven’t!

The EU recently announced its intention to investigate the proposed takeover of the Spanish airline on the grounds that it would harm competition on certain domestic and international routes to and from Spain.

It has given itself until June 7, 2024 to submit its findings.

Lufthansa Group’s takeover of ITA at a standstill

The Lufthansa Group’s takeover of ITA is more recent, putting an end to the Alitalia soap opera that lasted over 10 years. The German group was in a hurry to obtain approval from the European authorities, but it looks as though it will have to wait.

According to Europe, this takeover would create a monopoly situation on 6 routes, and Lufthansa has proposed that a certain number of slots be returned to Milan Linate, among others. But that doesn’t seem to be enough for the authorities, who are currently blocking the project.

An investigation has been launched and the EU has given itself until June 6, 2024 to decide.

The partnership between Air France and CMA-CGM rejected by the United States

It was not the EU but the US regulator that put an end to the partnership initiated between Air France-KLM and CMA-CGM. This major freight partnership was accompanied by CMA-CGM taking a 9% stake in the Franco-Dutch group.

But the US government took a dim view, claiming that the freight specialist’s entry into the transatlantic joint venture between Air France-KLM, Delta Air Lines and Virgin Atlantic in cargo created a situation that undermined competition.

A strange decision, given that this joint venture is primarily aimed at transporting passengers and not goods, and it may be thought that this decision is primarily intended to protect US players in a context of deteriorating market conditions and tensions at a time when US airlines could have been stripped of slots at Schiphol.

While the two groups will be able to explore new ways of working together, there will be no question of integration as tight as that provided by a joint venture.

Air France-KLM-SAS soon in the firing line?

Against this backdrop, we wonder whether Air France-KLM’s potential takeover of SAS could also be affected. Unlike the two recent cases, this is not a controlling stake at this stage, which is unlikely to happen for at least another two years, so we can be optimistic.

However, it is also possible that the authorities will consider that enhanced commercial cooperation and a change of alliance are sufficient to have an impact on competition, bearing in mind that a takeover is the ultimate objective. Or will they wait until the control takeover becomes a reality?

But there is also talk of SAS joining the transatlantic joint venture, so the US regulator might be tempted to oppose it for the same reasons it opposed CMA-CGM’s entry.

Would SAS be just as interesting for Air France-KLM if slots had to be returned and there was no possibility of integrating SAS into the joint venture? The question can be asked.

In any case, having seen how long it took for the EU to take an interest in the IAG and Lufthansa Group acquisitions, and knowing that in the case of SAS we’re only talking about a partial acquisition, we can’t expect to hear much more about this case for a long time to come, if anyone thinks it’s worth investigating.

In any case, the recent statement by SAS CEO Anko van der Werff, concerned by the EU’s over-cautious approach to the subject, shows that serenity does not reign on this issue.

But in the meantime, Air France-KLM’s takeover of SAS is far from a certainty.

Competition or employment, you have to choose

The reasons given by the various authorities are widely understandable and audible, and are primarily aimed at protecting the consumer, which is their role.

But ironically, as Anko van der Werff also notes, if the EU wants to make flights more expensive for environmental reasons, preventing concentration isn’t very consistent.

On the other hand, we can’t help wondering what would happen to these airlines if, tomorrow, another crisis were to arise and they had to face it alone.

Whether we’re talking about ITAs and SAS today, TAPs and others tomorrow, they’re certainly not capable of it and there are only three potential buyers on the market IAG, Lufthansa Group and Air France-KLM (if IAG can be considered a European group, which I don’t think the EU has yet decided). Of course, investment funds are still a possibility, but shareholders (which are often the countries themselves) usually prefer an industrial partner who can develop synergies. What’s more, the majority of funds operating in this market are American, which rules out the possibility of a majority stake.

So if, for totally understandable reasons, European airlines are prevented from reorganizing around the 3 majors, it’s a safe bet that the next crisis will lead to a massacre, with all the consequences that can be imagined for employment. Could we imagine these airlines joining forces to create a 4th major airline? We don’t think there’s room for a 4th major in Europe and, what’s more, we’ve never seen the alliance of 3 or 4 lame-ducks give a valid.

Protecting consumers today may mean putting jobs at risk tomorrow. One just has to be aware of it and assume it.

Bottom line

The regulators are keeping a close eye on the current merger trends in the airline sector, and we will be closely monitoring the important decisions to be handed down in June, before knowing whether the SAS case also attracts their attention.

But protecting the consumer in this way potentially jeopardizes the survival of certain airlines, which would not be able to survive a crisis without the backing of the majors.

Image : Lufthansa aircraft in Frankfurt by Nate Hovee via Shutterstock