A number of European airline groups are trying to acquire smaller carriers, but many regulators are not happy with this consolidation trend.
After 9/11, the airline industry in the United States underwent one of its greatest-ever crises. Cost-cutting was inevitable and included multiple airline mergers and acquisitions. Even before 2001, many believed there was a lot of fragmentation in the industry, making consolidation inevitable.
European airlines certainly felt the effects of 9/11, but not as strongly or for as long. Other events, like the rise of low-cost carriers, reshaped the industry in the ‘00s, driving the creation of a few powerful airline groups. However, the creation of these groups wasn’t as noticeable since the smaller airlines retained their names, post-acquisition.
Today, the United States is resisting further airline consolidation efforts, as we’ve seen with JetBlue’s efforts to acquire Spirit. But Europe hasn’t been looking favorably at such moves, either. Lufthansa had been chasing the acquisition of Italy’s ITA, the successor to Alitalia, for around a year.
The Price Of Airline Consolidation (for the airlines)
That process involved a growing list of concessions to assure regulators that acquiring ITA wouldn’t hurt competition. As a result, Lufthansa will have to hand over key airport slots to its competitors. That’s 206 slots per week in Milan Linate Airport (LIML) in the summer and 192 in winter.
Lufthansa also has to align many North American flights with its competitors, to make connections more practical. And this is for only a 41% minority stake in ITA, at a cost of $350 million. However, Lufthansa could increase its stake at a later date.
One particularly interesting term that the EU Commission stipulated to approve this consolidation is that the deal can’t go through until other airlines and airline groups start operating the routes (and slots) that Lufthansa handed over.
This is because, in the case of previous acquisitions, competitors eventually decided against using these slots or routes for competitive reasons. This reduced passengers’ options, which the Commission is keen to avoid this time.
Just One Of Many Moves?
Another crucial condition in the deal is that ITA will no longer require Italian state aid. The Italian government had sought to privatize ITA since the airline replaced Alitalia. Supporters of airline consolidation, like easyJet CEO Johan Lundgren, like to highlight this: the alternative to consolidation is continued government funding.
The Lufthansa/ITA deal is only one of several similar moves in Europe today. Elsewhere on the continent, IAG (parent of British Airways, Iberia, etc.) has been chasing a deal with Air Europa. Its investors believe that the Lufthansa deal boosts its own chances for approval. Again, this involves generous concessions, including 52% of Europa’s slots at key airports.
Elsewhere still, Air France KLM is negotiating a 19.9% stake in SAS. Finally, another airline consolidation move involves Portugal’s TAP. The Lufthansa Group, IAG and Air France KLM are all eyeing the Portuguese flag carrier.
The three “flag” carrier groups have to compete with Europe’s low-cost carrier groups, primarily Ryanair, Wizz Air and easyJet. Interestingly, regulators often don’t see low-cost carriers as competition for flag carriers, affecting their market assessment.
All in all, there is substantial demand for consolidation in Europe’s airline industry – which could include low-cost carriers. But the price for approval for all airlines pursuing such deals will likely remain steep.
Source
The post Can European Airline Consolidation Go Ahead (like in the U.S.)? appeared first on Mentour Pilot.