As the deadline neared in September for bids to acquire parts of airberlin’s short-haul business, who will own what was far from clear. But Europe’s LCCs and leisure carriers, including UK LCC easyJet, Thomas Cook Group and Germany’s Condor and TUIfly, scrambled to express interest in airberlin, highlighting how much the region’s commercial aviation landscape has changed.
LCCs—notably Ryanair—are also among those interested in acquiring assets of bankrupt Alitalia.
The proliferation of LCCs is not a bad thing in itself; for the European traveler, the choice of frequencies, destinations and low fares has never been better. LCCs, especially easyJet and Ryanair, have forced the legacy carriers to be more competitive. And some are financially successful: Exhibits A, B and C being easyJet, Ryanair and Hungary-based Wizz Air.
But as the airberlin and Alitalia insolvency filings show, not everyone can operate with financial success in this environment. Neither is an LCC—although airberlin has an LCC-like business model in its short-haul operations—but neither has the operating costs to compete in a market that is predominantly low cost and which must also compete with trains.
Put bluntly, Europe has too much of a good thing. There are some 10 LCCs and several of them have commitments for large numbers of new jets, especially the new, super-efficient narrowbodies. While some of those new aircraft will replace aging, noisier and less efficient jets, Europe’s LCCs are still focused on growth and will want to add frequencies and push more into the territories traditionally held by the flagships, as Ryanair is now doing in Frankfurt.
This follows a pattern seen in the US, where Southwest Airlines has infiltrated fortress hubs such as Atlanta Hartsfield, Delta Air Lines’ home base. Southwest’s transition from a major LCC to one of the four majors that now dominates the US domestic market—along with American, Delta and United—came about after US industry consolidation that included Southwest’s merger with AirTran Airways, through which it inherited Mexican and Caribbean routes and became an international player. In a consolidated industry, size is imperative (hence Alaska Airlines desire to grow via its merger with Virgin America).
That is one of the reasons Europe’s LCCs are interested in airberlin and Alitalia assets, which provide opportunities to add size and extend reach.
Ultimately, however, another wave of consolidation will be needed if Europe’s carriers are to achieve and sustain the profit margins that the US airlines are now seeing. If there is any positive outcome of the airberlin and Alitalia situations, it may be that they trigger a consolidation that puts the industry on a stronger financial footing.