RESEARCH REPORT

In brief

In brief

  • Major European airlines face currency fluctuations, political instability and rising fuel prices. They must also battle new threats and grow margin.
  • European Majors have faced difficulties in their core business and network, resulting in margins that have lagged the global airline industry.
  • European airlines must balance their long-term supply against a competitively determined market demand.
  • Applying digital technologies to the whole value chain is the key to staying ahead of ever-changing competition.


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.

Intra-European competition

Competition from new entrants in the intra-European markets has long been a challenge. Several factors are adding the pressure:

12%

Since 2006, European low and ultra-low-cost carriers have grown their fleets at a rate of 12 percent per year.

2%

European Majors have also grown capacity, but at a lower 2 percent per annum rate.2

40%

Consequently, low and ultra-low-cost carriers increased their capacity share from 17 percent to nearly 40 percent, with further erosion of network carriers’ market share likely in the future.3

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.

View forward

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:

Create frictionless and personal travel experiences

Digital technologies such as AI, analytics and IoT will allow leading airlines to deliver on customer expectations by providing personalized, frictionless travel.

Invest in digitalizing operations

Analytics & real-time intelligence are critical to remove inefficiencies in core airline operations, and gain operational efficiencies in finance, human resources and information technology functions.

Collaborate to create new fields of value

To own the end-to-end travel experience, airlines must work with partners across the travel ecosystem. Forward-thinking leaders leverage these relationships to redefine their competitive advantage.

1 ASCEND

2, 3, 4 Innovata

John Luth

Chairman and CEO


Jonathan Sullivan

Managing Director


David Walfisch

Principal Director

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