Europe’s airlines: Is a takeover storm brewing?

The American airline sector has consolidated heavily in the last 15 years, and it is still ongoing. Is this a sign of things to come in Europe? Unlikely. But there is good reason for that.

A whole series of interplaying factors could soon lead European air traffic into a perfect storm. Take for example the fragmented market, of which the five largest airlines cover just half. Many of the industry’s companies are suffering from pandemic-induced debt, while also struggling to cope with high demand. To add fuel to the fire, recession – with its unforecastable consequences – looms large. And we can’t not mention inflation.

Following a wave of consolidation of the U.S. airline sector, ITA Airways and TAP Air Portugal have more or less publicly put themselves up for sale – with ITA seemingly close to being taken over by Lufthansa Group, while others are in the process of restructuring. Could a similar storm be headed for Europe?

The calm before the storm?

Indeed, several airlines have disappeared from the European market recently, and others are vulnerable to the same fate. The pandemic wasn’t the only reason for this development, either. Fierce competition and EU subsidy regulations have played their part, too.

Nevertheless, the great takeover storm we have seen in the U.S. has not yet materialized.

But why not? I see five main barriers.

1. Differences between Europe and America.

Comparisons between the U.S. and Europe are flawed. Whereas the U.S. has a uniformly regulated aviation market, Europe consists of a large number of submarkets with national legal requirements and conditions. Experiences from one region cannot simply be transferred to others.

2. Only a few airlines are attractive takeover targets.

The main reasons for an airline takeover are access to the respective catchment area in order to expand the existing network. Whoever buys ITA Airways will naturally be better positioned in the Italian market. Speaking of which, it’s easy to see why ITA Airways, with 190 million passengers in Italy per year (2019), could be an appealing acquisition. Today, Europe’s major airline groups (Lufthansa Group, Air France/KLM, IAG) hardly operate at all in Italy, with low-cost airlines dominating alongside ITA Airways. A purchase of ITA by Lufthansa Group is likely to change that, especially since the buyer will integrate the ITA network into its hub system. TAP Air Portugal, on the other hand, is well linked with South America, which Star Alliance partners in particular are likely to be interested in.

When it comes to airlines, size matters, too. Large, preferably uniform fleets are more profitable in terms of procurement and maintenance. In Europe, however, unlike in the U.S., there are strict limits to these economies of scale: Individual airlines must maintain their local Air Operator Certificates (AOCs), otherwise the owners lose their privileges under aviation law and landing and take-off slots.

3. The companies are not always a good match.

More often than not, takeover candidates are not entirely innocent regarding their financial predicament. For this reason alone, buyers will want to implement their own strategy – but they also need the necessary influence to do so. And if the business models and corporate cultures differ too much, further problems are inevitable. There are plenty of examples of this. Either a half-baked hybrid is created from the existing business models, or the purchased company is practically abandoned altogether and serves only as a favorable opportunity for the acquisition of aircraft, flight rights, or airport slots.

4. Governments can step in.

It is true that almost all large airlines in Europe have long since been privatized. But when the going gets tough (let’s say, during a pandemic!), governments are still on hand to offer support. In particular, airlines that represent a country by name, national color, or by sheer popularity can hope for support in financially difficult times. That being the case, a takeover trend might not be necessary.

5. The antitrust law remains a factor.

As mentioned earlier, the European market as a whole is fragmented. But this is only really true if you look at the numbers. The practical reality is usually different. In some regional transport areas, oligopolies have long been in place or are on the rise; in some areas, there are monopolies. The antitrust law is therefore likely to prevent many conceivable takeovers.

No storm, but clouds could still form.

Do I believe in a consolidation of the European aviation market? Absolutely! But it will most likely be a slow, gradual process. Individual takeovers will happen, insolvencies will be much more frequent, and abandoned routes will be absorbed by existing airlines ...

… but there is no takeover storm in sight.