What The Next Wave Of Airline Consolidation Could Look Like

The U.S. aviation industry has undergone significant consolidation over the past couple of decades, shrinking from 10 major carriers to four, which has led to a sector better equipped to withstand economic challenges.

Although recent political opposition has derailed some mergers, including the proposed $3.8 billion deal between New York-based JetBlue Airways and Florida-based LCC Spirit Airlines, the overall effect has been greater financial stability and profitability for U.S. carriers compared to their counterparts in Europe, where the sector is more fragmented. The top five European airline groups control 43% of intra-regional capacity, whereas the top five US carriers dominate about 83% of the domestic market, according to OAG data.

The European landscape, however, is gradually shifting. Major players like Air France-KLM Group, British Airways parent International Airlines Group (IAG), and Lufthansa Group are pursuing acquisitions to strengthen their market positions.

After more than a year of negotiations and regulatory scrutiny, Lufthansa secured approval from the European Commission (EC) in July to acquire a 41% stake in ITA Airways, the successor to Alitalia. The deal is expected to close before the end of the year and represents a €325 million ($350 million) investment in Italy’s national airline. It also includes a mechanism for Lufthansa to take full control from 2025, contingent on ITA’s performance.

The EC’s approval will require the German carrier to cede valuable routes and slots at Milan Linate Airport (LIN) to rivals, intended to mitigate concerns about reduced competition, particularly on key routes between Italy and other European destinations. However, Lufthansa maintains that the acquisition is a strategic win, with Group CEO Carsten Spohr emphasizing ITA’s potential for growth and the value of the Rome Fiumicino (FCO) hub in the group’s network.

“We continue our internationalization to be less dependent on the German market,” Spohr said. “With ITA, we’re not just acquiring a company with a positive growth perspective based on the start-up culture and cost structure they have been able to achieve . . . we are getting access to a five-star hub in our multi-hub network. It’s one of the few hubs in Europe with room for extension, which might not be important for the next one, two, or three years, but surely for the strategic outlook.”

Spohr sees Rome as a gateway to new markets in Southern Europe, Latin America, and North Africa, and as a solution to capacity constraints at Frankfurt, Munich, and Zurich. However, while ITA has a more cost-efficient labor force than Alitalia, it has struggled with profitability, reflecting ongoing revenue challenges exacerbated by fierce competition from LCCs. The airline’s market share is smaller than Alitalia’s before the pandemic, and its yields have suffered.

“Italy is clearly a very attractive market—it’s home to 60 million people, it’s a desirable tourist destination, and it’s already the third largest for the Lufthansa Group after Germany and the US,” Alex Irving, Bernstein’s head of European transport equity research, told ATW. “This is where the main attraction lies.”

While he acknowledged that the Italian market is highly competitive—with LCCs Ryanair and Wizz Air significantly expanding in recent years and making point-to-point short-haul routes particularly challenging for legacy carriers with higher cost structures—Irving expects Lufthansa to use Rome primarily as a hub for long-haul operations.

Despite this, he noted that the cultural and operational differences between Lufthansa and ITA Airways could pose challenges, stressing the difficulty of integrating the German business model with the Italian airline’s operations, particularly given Alitalia’s history of financial struggles, union resistance, and reliance on government bailouts.

“Can you simply transplant the Lufthansa way of doing things into Italy? That’s going to be something that needs to be very carefully managed,” Irving said.

Eyeing Northern Markets

While Lufthansa is expanding its operations in Southern Europe, Air France-KLM is focused on increasing its influence in the north. The Franco-Dutch airline group has completed the acquisition of an initial 19.9% stake in Scandinavian Airlines (SAS), joining forces with investment firm Castlelake, which will take a 32% stake, the Danish State at 25.8%, and Lind Invest at 8.6%. This investment is a key component of SAS’s restructuring efforts following its Chapter 11 bankruptcy filing in 2022.

A major aspect of this deal is SAS’s transition from the Star Alliance global alliance to SkyTeam, strengthening its alignment with Air France-KLM. This shift, combined with Air France-KLM’s existing network of over 200 weekly flights between their hubs at Paris Charles de Gaulle (CDG) and Amsterdam Schiphol (AMS) and SAS’s hubs in Copenhagen, Oslo, and Stockholm, will be bolstered by a new codeshare agreement.

SAS is also expected to join the SkyTeam transatlantic JV with Air France-KLM, Delta Air Lines, and Virgin Atlantic. Although integrating SAS may face challenges, particularly navigating US antitrust approvals, Air France-KLM CEO Benjamin Smith is confident that the Scandinavian carrier is the “most straightforward” airline to incorporate into any of the transatlantic pacts.

“When you look at the two groups that we compete against across the Atlantic, we believe it is the easiest airline to integrate and justify a benefit to consumers out of Scandinavia,” Smith said, adding that the ease of the process will largely depend on which administration is in place following the November US presidential election.

SAS has already launched a new route between Copenhagen and Atlanta, operating daily during the summer months with Airbus A330-300s, and plans to introduce a codeshare with Delta to unlock new destinations in the U.S., Caribbean, and Latin America. SAS CEO Anko van der Werff confirmed to ATW that the airline’s hub structure in Copenhagen, Stockholm, and Oslo would remain unchanged post-restructure, despite the Swedish government’s exit as a shareholder. The Norwegian state previously cut ties in 2018.

“Do you have to have state ownership to serve your customers? I don’t see the link,” van der Werff said. “Sweden is very important for us; Norway is very important for us. We have a 45% slot share at Oslo and we’re not going to give away that. It’s the same with Stockholm—it has always been a good market for us.”

Air France-KLM’s investment in SAS therefore allows the group to gain greater access to three hubs at a time when capacity constraints are affecting operations in Amsterdam and Paris. This reduces its reliance on its main bases and taps into a market with substantial growth potential.

The northern European market holds significant promise, not just for winter tourism but increasingly for summer travel as well. Changing leisure patterns, driven by increasingly hot summers in Southern Europe, are pushing more travelers to cooler northern destinations.

Norwegian has capitalized on this trend, launching almost 50 new routes in the summer of 2024, particularly in northern Norway, while the acquisition of regional carrier Widerøe has expanded its network to more niche destinations. Although the LCC in July revised its 2024 profit forecast downward, it has reported strong summer bookings.

While Lufthansa has managed to clear regulatory hurdles to acquire ITA despite some hefty concessions, and Air France-KLM has taken an initial 19.9% stake in SAS, the same cannot be said of IAG’s attempt to acquire the remaining 80% of Spanish carrier Air Europa.

IAG had wanted to take full control of Air Europa to accelerate development of its Madrid hub and further strengthen its position on Europe-Latin America routes. However, the regulatory price was too high, and the proposed deal was called off in August. IAG will now pay the Spanish carrier’s majority owner, Globalia, a €50 million break fee because of the termination but will maintain a 20% stake in Air Europa.

The EC initiated an in-depth investigation into the proposed transaction in January, as it expressed concerns that the acquisition could negatively impact competition on routes to, from, and within Spain. IAG CEO Luis Gallego said the group put forward “a very generous and ambitious remedy package,” which proposed transferring 52% of Air Europa’s frequencies in 2023 to two remedy takers but said the EC’s conditions on the deal were too onerous.

TAP Interest

Despite the setback, Gallego explained the company continues to see the benefits of airline consolidation and retains an interest in buying TAP Air Portugal—an airline that looks likely to be Europe’s next big consolidation story thanks to its strong network, especially on routes to South America, and its modern fleet, which includes Airbus A321-200LRs, A320-200neos, A321-200neos, and A330-900neos.

“We want to consolidate the industry because we consider it good for the customers and to have strong groups that can compete globally,” Gallego said. “We will continue exploring opportunities that make the group stronger.”

He added that IAG—the parent company of Aer Lingus, British Airways, Iberia, Level, and Vueling—has been analyzing the potential to acquire TAP in parallel to the Air Europa deal and would consider assessing the viability of a takeover. Portugal’s previous center-left government began the privatization process for the country’s flag carrier in 2023. It is understood that the new government, which assumed office in April, is also open to a sale.

“Maybe it’s something that can be interesting for us,” Gallego said. “In the same way that we have a dual hub strategy in the north, with Dublin and London, we consider that a dual hub strategy in the south with Lisbon or Madrid can be optimal for the group.” However, he made it clear that IAG would proceed cautiously, only pursuing acquisitions that would strengthen the group’s financial position.

“IAG doesn’t need to do deals—it already makes better margins and better return on invested capital than most other network airlines of which I’m aware—but given its track record, it can be successful with other M&A deals for the right asset at the right price,” Bernstein’s Irving said.

He pointed out that while IAG is strong on long-haul routes between Europe and Spanish-speaking countries in Latin America, its market share on Europe-Brazil routes will be lower than that of both Air France-KLM and Lufthansa, once the ITA deal goes through. “That might suggest there could be fewer Commission concerns than IAG faced with Air Europa,” Irving added.

The Next Moves?

While the moves for ITA and SAS, along with the probable privatization of TAP, will likely keep Europe’s big three network groups busy in the short term, the prospect of larger acquisitions beyond that looks to be more limited.

Neil Fraser, manager of airline analysis at intelligence and advisory company IBA Group, suggested that second-tier carriers like Star Alliance member LOT Polish Airlines could become a target—four years after a consolidation move of its own to buy Germany’s Condor fell through. He added that other smaller players, like state-owned airBaltic, could also find themselves in the spotlight.

“AirBaltic is planning an IPO later this year or early next, but a larger group may see it as an attractive acquisition further down the line,” Fraser said. “It has carved out a niche connecting the Baltic region and has a pipeline of new [Airbus] A220s arriving before the end of the decade. Such aircraft order books will come into executives’ thinking given the aircraft supply shortage.”

In the LCC space, Ryanair Group CEO Michael O’Leary has maintained that the company will not be participating in large-scale acquisitions, like its Lauda deal in 2018 and multiple failed attempts to buy Aer Lingus. However, UK-based LCC easyJet and Wizz Air could be in the frame—as acquirers or targets.

“EasyJet is probably attractive to a network airline given its slot portfolio in London, Amsterdam, Paris, Geneva, and Milan—although all the major groups have an overlap in one or more of these cities,” Irving said. “There would therefore have to be significant remedies in one or more markets in the event of consolidation between easyJet and one of the big three airline groups.”

However, the regulatory environment will continue to remain a critical factor in shaping Europe’s airline industry. The EC’s increasingly stringent approach to mergers—evidenced by its tough stance on IAG’s proposed acquisition of Air Europa and the concessions needed for Lufthansa to push through the ITA purchase—reflects a broader trend towards stricter oversight.

“Speaking generally, the EU has been tougher on airline deals, and our expectation is that in future, rather than simple airline slot disposals, merging parties may need to find an upfront buyer for these divestments for the EC to review to secure clearance,” Lucinda Guthrie, head of M&A intelligence firm Mergermarket, told ATW. “The question is, what will be the Commission’s next move on this topic if further consolidation emerges?”