Navigating mounting pressure
Fluctuating currency, political instability and a notable rise in fuel prices have put European airlines under pressure. Competitive invasions from new entrants such as low and ultra-low-cost carriers (LCC and ULCCs) and new business models are encroaching on traditional sources of revenue of legacy carriers, gaining share in intra-European markets and also expanding into North American markets.
The question facing European legacy airlines, with no signs of competitive pressures easing, is two-fold: How to accelerate competitive response to new entrants? And where to find the next set of operating and cost efficiencies?
Lagging margins amidst competitive threats
Margins of major European airlines have lagged the global airline industry in the last decade (as measured by IATA). The rise of the three large Middle East carriers has been a significant source of margin erosion. In the past 10 years, the ME Big Three (Emirates, Qatar and Etihad) have grown their widebody fleets by 10 percent per year, a rate that is five times faster than the European majors.1 They also have built sophisticated hub structures designed to divert major intercontinental traffic through the region. The European Majors are slowing the trend by taking mitigative action as large Middle East carriers moderate their aggressive expansion.
Competition from new entrants in the intra-European markets has long been a challenge. Several factors are adding the pressure:
Majors on the move
European Majors have taken steps such as pursuing joint ventures and consolidation, which have helped to successfully defend, and in some cases, grow market share in their home markets. Yet these airlines still lag behind North American competitors.
The top four carrier groups (IAG, Lufthansa Group, Air France KLM and Ryanair) now account for 43 percent of European capacity versus 39 percent in 2009. In comparison, North American consolidation has been faster and stronger with the top four carriers growing their share from 55 percent to 68 percent over the same time period.4 Each now enjoys greater than 50 percent share of the takeoff and landing slots at their home airports. They have also been successful in developing joint ventures agreements with carriers across the globe—linking international hub and spoke systems and improving the network reach and product offering to core customers.
Yield pressures will remain across all of European aviation and combined with the recent rise in fuel prices, weaknesses within business models will begin to surface. To respond to continued competitive threats while delivering sustainable returns on capital, all European airlines will need to overcome a range of structural and organizational challenges, seek a more rational competitive structure while balancing their long-term supply against a competitively determined market demand.
Taking off to the future
The only medium-term protection from competitive disruption is a continual enhancement of the customer proposition combined with concurrent improvements in efficiency of how it is delivered. A key element of this better and more efficient approach will be how quickly European carriers adopt digital technologies throughout their businesses. The benefits of digital technologies will come from more tailored customer experiences, more efficient functions, and improved nimbleness across airline planning, customer, operation and enterprise operations.
European airlines that want to lead in the future will seek to: