Scope Ratings says Madrid-based Air Europa which specialises in serving destinations in Latin America is just the latest in a long list of small or mid-sized carriers that have gone out of business, merged or been acquired in 2019, leaving more airport slots and routes in the hands of British Airways- and Iberia-parent IAG, Lufthansa Group, Air France-KLM, easyJet and Ryanair.

“A mix of excess capacity and fierce competition which puts downward pressure on ticket prices and compresses profit margins despite growth in passenger traffic are making it very difficult for all but the biggest carriers to survive,” says Azza Chammem, analyst at Scope. “Small airlines serving just the European market have struggled for some time, but now we see those that have tried to carve out niches in transatlantic travel and other long-haul routes battling to survive too.”

Air Europa’s embrace by IAG in a EUR 1bn deal strengthens the position of the owner of British Airways and Iberia in Spain. Air France-KLM should similarly benefit from the collapse earlier this year of France-based Aigle Azur and XL Airways as should Lufthansa Group from the collapse of Slovenian airline Adria airways. Valuable UK slots owned by the recently defunct Thomas Cook are up for grabs for British Airways, easyJet and Ryanair. Pressure on Norwegian to restructure its finances has led to cutbacks at the Oslo-based long-haul budget carrier which has sold planes and reduced the number of routes it flies.

“We think the shake-out in the European sector will continue as long as interest rates remain cheap and the larger and more creditworthy airlines can benefit from their better cost profiles and the financial strength to fund the buyout of bankrupt firms,” says Chammem.

“It is tougher for small airlines to pass on increased costs – from volatile jet-fuel prices, US dollar appreciation, higher wages costs, airport charges and passenger reimbursements – than bigger carriers which have also faced difficult trading conditions this year,” says Chammem. The grounding of Boeing’s 737 Max aircraft, uncertainty over Brexit and strikes by cabin crew, pilots and air-traffic controllers are among the issues that have weighed on the performance of some of the bigger carriers.

According to Scope’s calculations, Lufthansa Group (BBB/Stable) has increased its leading European market share to 12.3% in 2018 (142m passengers in 2018), taking it ahead of Ryanair’s 12% share, International Consolidated Airlines Group’s 9.8%, Air France-KLM with 8.8% and easyJet with 7.7%. The European airline sector remained fragmented – other airlines retained 49.4% of the market. “The overall trend will have persisted in 2019,” says Chammem.

Author: Matthew Curtin: m.curtin@scopegroup.com