Podcast: The State Of The European Airline Market

Editors discuss airline failures, acquisitions and partnerships that will shape the European aviation market as it heads into its busiest season.

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Rush Transcript

Karen Walker:

Hello everyone and thank you for joining us Window Seat, our Aviation Week Air Transport podcast. I'm Air Transport World and Aviation Week Network, Air Transport editor-in-chief, Karen Walker. Welcome on board.

So there's been quite a bit of activity in the European market of late and not all of it's positive. Two airlines have gone out of business and the financial outlook for some others isn't that reassuring. And there's a lot of talk about further consolidation and who maybe could be buying who. And of course on top of all of that, we're quickly heading into the peak spring and summer travel season, which is looking like there's strong demand there. So that's what we're going to take a bit of a deep dive in, what's happening across the European Airlines. And to do that, I'm delighted to be joined today by two of my European based colleagues, David Casey, the Routes editor-in-chief in the UK, and Jens Flottau, the Aviation Week commercial director who's in Germany.

David, Jens, great to be with you again. Thank you for joining us. So let's start with those two airlines that have ceased operations in the last couple of weeks. David, Flybe was a UK airline that at one point had been Europe's largest regional carrier with a fleet of more than 60 Dash 8-400s. Then it went into administration similar to Chapter 11 in the US and that was the second time in less than two years that it had done that. And by that time it was reduced to a fleet of just eight turboprops. So a significant reduction already. And the second time there was no rescue package. So what led to Flybe's demise and how is that significant?

David Casey:

Thanks Karen. As you say, some listeners may have a sense of deja vu about the failure of Flybe because it is less than three years since their previous incarnation collapsed. So just to give a bit of context, Flybe was carrying nine million passengers a year at its peak and it grounded flights in March 2020 with about two thousand job losses. But prior to that it had been a major player in the UK domestic market as well as offering some short haul European regional flights, many of which were underserved by other operators. And during 2019, it had a near 40% share of all domestic capacity in the UK. Now at the time of the failure in 2020, it blamed the pandemic, but in truth it had been teetering on the brink for some time and had posted some quite heavy losses. So if we fast-forward though to April 2022, the latest incarnation of Flybe took to the skies under new ownership.

And this business, as you said, it was significantly smaller than the original incarnation. It offered about 11 domestic routes and I think eight international services last summer with bases in Birmingham and Belfast City. But the latest administration happened in late January and the collapse has been blamed on the delivery delays to 17 aircraft that the management needed to scale up operations and to make it more competitive. In terms of how significant it is on the market, I'd say it's going to be far less of an impact than when the first incarnation of Flybe went bust. When that went into administration it operated some 70 UK domestic routes and it left some airports with very, very few scheduled flights. I'm thinking Exeter and Southampton. And since then we've seen a lot of other competitors come into the market and really increase their domestic share. So that meant when the new Flybe emerged last April, it found the domestic market really tough going and a very different landscape really from when the last one exited.

I think it had competition on something like 70% of the routes that it served. And we're already seeing that since its demise in January, competitors are moving into those routes. So we've got Emerald Airlines, which operates flights for Aer Lingus, Loganair and easyJet. They're stepping into increased capacity on those former Flybe routes.

So on the whole, I think we'll probably see Flybe's network taken up quite quickly by other operators, but there could be some capacity challenges this summer on some of those route which could push fares higher. But on the whole, I don't think it will have a huge impact this time around compared to what happened last time.

Karen Walker:

So it would appear that in this case for most people, they'll still be able to get to the points that they were traveling and as you say there is other capacity that's moving into those routes. So the other airline that has also hit the end of the road is Flyr the Norwegian low-cost carrier. What was the story there is, are there similarities or was it a different tale?

Jens Flottau:

Well, it was different in the sense that it didn't build on the legacy of a previous airline of the same name. It was an 18-month-old airline, one of the startups in Europe, kind of post pandemic. Maybe launched a little bit too soon. 12 aircraft, six MAXs, six NGs.

The end of the story was that Flyr couldn't make a capital increase work and that would've been a prerequisite for a leasing deal, a work leasing deal that the airline had had in the works for another operator for the summer for six aircraft. Now if you're going to lease out half of your fleet to another airline for the summer then something's going wrong before that. So they were in trouble.

Why were they in trouble? I guess one big part of the issue was omicron. Omicron delayed a recovery in the European [inaudible 00:06:13] in general, we can talk about that in broader terms. I guess it applies to other airlines as well. The big problem for Flyr in particular was domestic routes. Domestic didn't take off for them at all. They were competing with Norwegian and with other airlines there. Their competitors were observing very irrational pricing by Flyr. So you could tell by the way they priced their flights that they were already getting desperate. During '22, things didn't improve, so a small operator that simply ran out of money.

Karen Walker:

So what I'm also hearing is also just how much competition of course there across Europe. And so as you say, if an airline isn't successfully financed to stay for the long term, especially if it's a relatively new player and it's getting a lot of competition, that's sort of making a very tough market even with this sort of record demand that we're seeing as everybody's going back to more normal travel habits. So let's just look at a couple of other airlines as well over there. And Jens again, tell us about Hans Airways.

Jens Flottau:

Hans Airways. Well that's an interesting one. They're trying to launch long haul flights between the UK and India, but it seems that that project isn't taking off either. Hans just said that they were looking at placing its aircraft with other operators, which to me says they're not ready yet to launch their own scheduled flights. So it's another case of these startups having a really hard time getting off the ground really. This time a long haul airline, which is obviously particularly risky because of the financing and the risk. I mean just the revenue and risk that is involved with flying large aircraft as opposed to smaller aircraft on shorter routes.

Karen Walker:

So Hans is an example of another startup with a, shall we be kind to say a brave idea, but not getting really off the ground. Then you've got across Europe, a lot of very established names and it seems to me that some are doing well, some are doing okay and some not so. And some of those that are doing not so good, it's almost like it's always the same names. There's a continuous pattern there. So this isn't just about the pandemic, I'm thinking here of SAS, Scandinavian Airlines. Jens, what's the situation there with SAS? Are their problems about the pandemic or does it go deeper than that?

Jens Flottau:

Oh, in my view it goes far, far deeper than that. They've been in trouble for decades, one can almost say. I think they're the perfect example of a medium-sized European airline that is kind of attached to its local market, which is too small to support an airline of the size and of the ambitions. There are many others that we're seeing that are in trouble today and we can surely talk about them. ITA Airways, Alitalia's successor, TAP Portugal, all these 50, 60 aircraft airlines or maybe a hundred that are struggling.

And SAS has another disadvantage, which is that it's a relatively small market, unlike Italy, unlike Portugal, which is an attractive tourist destination, has the long haul routes to Latin America. SAS doesn't have that. It does have high costs, it's got all the political aspects to handle with ownership of Denmark and Sweden historically, Norway was also a shareholder. So they're in a really, really tough spot under Chapter 11 right now, restructuring. As far as consolidation is concerned, they have said in the past, at least privately that they would be looking at becoming part of a larger group, but I'm not sure anyone would be interested in them because they're not attractive.

Karen Walker:

You mentioned ITA, Jens, so of course it now looks like Lufthansa is along the way to acquiring that airline, which as you say is essentially former Alitalia, which again is another airline that has gone in and out of financial doom and gloom for I don't know how long. I have to ask you, what do you think? Do you think that Lufthansa will be able to change that airline permanently?

Jens Flottau:

I think they can change it. The question is what are they going to change it into? My concerns about Alitalia in the past have always been about the airline as such. I tell you, there's no way you can buy that airline. It's high cost, inefficient, government run, highly political. Why would you do that? My concerns have changed a little bit. I'm still coming to the same conclusion. I don't think the airline as such is a problem right now. The costs are very low. Salaries for pilots are ridiculously low. They can't be sustained in fact, they have to come up higher because in the current market that won't work.

My concerns are now about the market. Italy is a low-cost market on short haul. Ryanair has a 40% market share there. In long haul, yes, you can probably operate a long haul airline out of Italy, but how large can it be? What is its niche going to be? How will that be integrated into the Lufthansa Group network and bottom line, why would you want to deal with all of these complexities and problems that don't add that much value to your airline? So I still have the same concerns that it ultimately won't work out.

Karen Walker:

Okay. And then you mentioned TAP Portugal and the boss of Air France-KLM has expressed interest that they feel that both Portugal and that airline because of its access to the South American market would be of interest. So David, in general, do you think that we are on the verge of more consolidation in Europe with more of this, of the big legacy airlines buying up the smaller niche airlines?

David Casey:

I think we will start to see some market consolidation happening, but I think it's just going to continue to be a slow process as it has been for decades. We're with nothing where they are in the US. I think we're going to still see some weaker players exit the market like Flyr and Flybe. And obviously we've got some mergers in the pipeline like Lufthansa's bid for ITA as you previously discussed. And as you mentioned, TAP Portugal is potentially up for sale and we're seeing IAG Iberia closing a deal with Air Europa.

M&A activity in Europe is much more complicated than it is perhaps in North America. There's a lot more political, cultural and competition related hurdles to overcome. And there's also that national pride as well. We saw during the pandemic that a lot of governments bailed out their airlines because they simply couldn't face seeing them disappear, seeing that flag carrier disappear from the market. But I think if we are going to see competition, it will be among some of the airlines that we've said like SAS, like TAP and some of those flight carriers. I know in the LCC space Wizz approached easyJet with a takeover in 2021. So there is the potential there, but I think the appetite amongst LCCs I is lower and I think they would face some bigger regulatory hurdles to get over than maybe some of the smaller flight carriers would.

Jens Flottau:

To me TAP is the most interesting case. As you say, Karen, Air France-KLM has said they're really, really interested in buying it. At the same time, Lufthansa Group and the Star Airlines, the [inaudible 00:14:52] can not afford to lose it because it's their main airline across the South Atlantic.

So I mean I talked about ITA and why I don't understand that Lufthansa would be buying the airline. I think they absolutely probably have to buy TAP just to secure their position across the South Atlantic. Whether or not TAP is a great airline, well run, efficient, profitable is another story. It's probably not, but market share arguments have always been very important. They are in the Italy case, they will be in the TAP case and this is going to be just a really fun one to watch Lufthansa against Air France going into this bidding war for TAP. But as David says, it'll take some time. The process hasn't yet started officially. It'll probably start by the end of this year then it'll probably take another year to be decided. But ultimately we'll have a lot of stories to write about that one.

Karen Walker:

So what are the airlines that are doing well in Europe? Particularly the low cost carriers, the ultra low-cost carriers, the Ryanairs, you've mentioned Wizz Air, easyJet, David, how are they doing?

David Casey:

Yeah, as you said, the three major LCCs right now, easyJet, Wizz, they continue to perform well. The same demand is strong and they're expecting good revenue performance over the coming months. I think all of them have increased the market share considerably over the last few years during the pandemic and they've certainly bounced back faster post covid than many other network carriers. If you look at some of the recent results for the last quarter, all of those three LCCs had healthy growth in revenue per passenger. And that's both from a ticket and obviously a revenue point of view.

And that's year-on-year growth and compared to 2019 as well. And I think Wizz and Ryanair both recorded Q4 passenger growth levels above the fourth quarter of 2019. And looking ahead, each of them have outlined strong demand for the summer season. easyJet and Ryanair have said they've achieved record booking revenue days in January and in Wizz's recent results, I think they spoke of booking volumes being ahead of 2022. And although fares are going up within Europe, there's few signs that the economic slowdown is actually hitting demand. So I think the outlook for all those three is really bright.

Karen Walker:

Whenever I'm in Europe, flying in Europe, I have to say I'm still amazed now, you turn up at major airports, not even secondary airports and you just see masses of the low cost carrier airplanes there. There's some that I'm like, I don't know what that even is, but you'll see not just one or two, but lots of Ryanairs, lots of easyJets depending on where you are. You just mentioned it Jens, you said about Italy has become a low cost market. Is that part of what's going on here do you think Jens, is that Europe has become so swayed towards that low-cost sector and they're the ones with the strength?

Jens Flottau:

Yeah, with some exceptions. I mean Italy, yes for sure. Spain of course UK, yes, France is different. Germany is very different because Lufthansa has managed to defend its hubs and German airports are so expensive that they're not attractive to low cost carriers. So we've seen Wizz Air reducing, Ryanair reducing, easyJet spent a lot of money on the Berlin base of airberlin in 2018 and look at what's left of it. Not much. So in general it's true, but there are important exceptions.

Karen Walker:

Interesting. And then David, you just said the outlook I think for spring and summer overall within Europe and then transatlantic is looking good, very high demand. I think we're looking at record demand in the transatlantic market. So how are the European carriers positioned, if you like, against the US carriers in that market?

David Casey:

The transatlantic market Europe-US looks to be very strong this summer. I think during July we're expecting at the minute, based on current schedules, we're expecting a record weekly number of flights. It is obviously the largest premium market in the world and I think transatlantic yields are remaining good. Business travel has returned strongly and we heard recently, I think Ben Smith the CEO of Air France-KLM said that the premium leisure market has exploded and he is, he's filling seats in business class, first class, premium economy cabins.

I think we are seeing though some of the US carriers are being a little more aggressive and experimental in terms of where they are adding capacity in Europe and some of the European carriers. We've seen United and Delta opening a few niche routes to smaller European leisure destinations. But on the whole, I think it will be a very positive summer. I think there is lots of demand still on these transatlantic routes.

Karen Walker:

Yeah, it's it interesting again what you said about some more aggressive tactics, but you're also seeing this is where the global alliances are coming in as well. Like American is starting for the season is leaning more heavily on its British Airways partner, where of course it's got a joint venture, transatlantic joint venture. So clearly there's adjustments going on here as everybody sort of works out how to meet this extra demand post pandemic. Bottom line for each of you, would you expect to see more failures, another Flybe this year happening in Europe? Any thoughts on that, Jens?

Jens Flottau:

I mean you can never rule out the failure of smaller airlines. I wouldn't expect another big one, high profile one. I mean summer is nearing, bookings are coming in, the cash flows should be good right now. So not anytime soon. I mean longer term, my concern would be that this boom is ending at some point, that catch up in pent-up demand in travel is ending and then the high costs will catch up on people. Fuel is still pretty expensive. Inflation is a huge topic over here. Will people really still be able to afford travel to the same extent that they do right now? So short-term I don't expect a big wave of failures, but let's wait and see. We're not done yet.

Karen Walker:

Good point, David.

David Casey:

Yeah, I agree with Jens. I don't think we're going to see a wave of failures, although we've had Flyr and Flybe. I think some of the startups that launched during the pandemic may continue to find it challenging. I'm thinking Norse Atlantic here and Play, they're going up against some real big incumbents. But so far they haven't fallen into the traps that some of the previous low cost transatlantic operators did. So where we saw Norwegian and WOW expanding too quickly and adding large amounts of capacity Norse and Play so far have been quite disciplined. So they do seem to be faring better, but I think as Jens said, for some of those startups and smaller operators, we could see some challenges.

Karen Walker:

Excellent. David, Jens, thank you so much for joining us. Hopefully what we are going to see is a good hot spring and summer season and hopefully not too many labor shortages or whatever else so that we see chaos at the airports as a result. Hopefully it'll be a bit more organized this year. So thank you also to our producer, Guy Ferneyhough and thank you of course to our listeners. Make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcasts or wherever you listen. Until next week, this is Karen Walker disembarking from Window Seat.