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Lufthansa and Air Berlin planes
REUTERS/Hannibal Hanschke
Lufthansa swoops on its rivals.
PLANE TRUTHS

European airlines are confronting the same grim reality their US counterparts faced decades ago

By Natasha Frost

In the past two decades, US airlines have undergone a radical transformation. Some have shuttered altogether, while others have poached their smaller competitors or merged with former rivals. In 2000, US consumers could fly domestically on any of about 10 medium-sized airlines. Today, those same 10 carriers have been merged into four giants, which together have more than 80% of flight capacity.

For airline bosses, these challenging acquisitions have ultimately been a positive step, Derek Kerr, the CFO of American Airlines, told Quartz earlier this year. “The US domestic industry is very profitable and it’s going to be profitable for a long period of time,” he said. “We know who we are, and we’re not flying unprofitable things. Through the mergers, we decreased flying and got the industry righted.”

Increasingly, something similar is happening in Europe.

Approximately 500 million people live in the nations of the European Union—roughly 50% more than the US. But while the US has just ten airlines carrying more than 10 million passengers a year, EU airlines are far more splintered, with more than 20 comparably-sized airlines zipping around the continent.

That’s gradually changing. The top four carriers in Europe, which all encompass multiple airlines, now control around 40% of the market. And they’re growing: On Nov. 4, International Airlines Group (IAG), the parent company of British Airways, announced that it would be taking over Spanish-headquartered AirEuropa, the ninth subsidiary controlled by the group. By the end of next year, the British-Spanish consortium will operate more than 80% of all domestic seats sold in Spain. IAG, formed in 2011, already owns Spain’s Iberia and low-cost Vueling.

This acquisition is just the latest in a series of takeovers in the region, with smaller players bought out by their more powerful competitors. In July, British regional airline flybe, which had around 9 million passengers in 2018, was acquired by a new consortium called Connect Airways, which also owns Virgin Atlantic. Flybe will rebrand as Virgin Connect in 2020.

 

The largest European airline groups are themselves Franken-carriers of sorts, comprised of many superficially unrelated parts. Unlike in the US, acquired European airlines tend to maintain their plane design, color scheme and brand identity—Swissair still looks as Swiss as it ever did, even though its owner is Germany’s Lufthansa Group. (Since 2005, Lufthansa has also picked up Austrian Airlines, Brussels Airlines, and Germanwings.)

There are whispers of other potential mergers on the horizon. Aviation analysts suggest Lufthansa could have its eye on Alitalia and Scandinavian Airlines, and Air France may also be looking to expand. While US airlines may have worked out a model for profitability, some European carriers are still some distance from steady growth. Budget carriers such as easyJet and Ryanair,  now Europe’s largest airline, have driven prices down and made it harder for mid-tier national airlines to turn a profit, leaving them ripe for takeover.

Meanwhile, attempts to compete on low-cost long haul flights have also proved challenging: Norwegian Air’s record third-quarter profits came after aggressive cuts, coupled with a two-year repayment delay from bondholders. It still has more than $350 million in outstanding debt. For the time being, however, the company has fought off potential buyers, including IAG.

If current trends continue, European consumers could find themselves left with only the illusion of choice, with apparent competitors actually owned by the same parent company. For shareholders and airlines, however, such mergers may be the saving grace for an industry that sometimes still struggles to remain aloft.