The world's most competitive airline market – Europe – just got a little less competitive. That's good news for airline investors, bad news for airline customers.
The collapse last week of Britain's Monarch Airlines followed the bankruptcy filings of two other big-name carriers – Alitalia and Air Berlin.
Monarch vanished overnight, leaving 110,000 passengers stranded abroad, though a massive repatriation effort that included the recruitment of Canada's Air Transat planes managed to get most of them home fairly quickly. Alitalia and Air Berlin are still flying but crash landings are not out of the question. Air Berlin will stop flying at the end of this month unless a buyer can be found – unlikely. Alitalia, a perennial money loser that has been called "too Italian to fail," is being supported by emergency government loans as it desperately searches for a buyer.
Venerable old Monarch, founded 50 years ago, was Britain's fifth largest airline. Air Berlin is Germany's second largest airline, and Alitalia is Italy's top airline. Is Europe's airline industry in crisis?
On the contrary, the industry has rarely been healthier, with the strongest airlines, notably the low-cost carriers Ryanair and easyJet, using their formidable market power to crush the weaklings. The survivors appear to have little interest in buying the dud airlines outright. When they go under, the big airlines are happy to soak up their crew and best assets. "The larger profitable competitors are cherry picking the bits they want – planes, landing slots and staff," said independent London analyst Louise Cooper.
The result is powerful airlines that become even more powerful.
The market valuations tell the story. As the weaklings fall away and oil prices stay low, the biggest European carriers have turned into stock-market darlings.
Dublin-based Ryanair, which boasted a class-leading operating profit margin of 23.1 per cent in 2016, has seen its share price rise by more than 50 per cent in the past year, taking its market value to £20-billion ($33-billion), though the recent pilot-scheduling mess that forced it to cancel 2,000 flights has knocked the share price down a bit. EasyJet is up 43 per cent in the last year.
The three other European heavyweights are on a roll, too, even though they are "legacy" airlines that can't match the low-cost structure of Ryanair and easyJet.
IAG Group, owner of British Airways, Aer Lingus, Iberia and Vueling, has climbed 65 per cent; Germany's Lufthansa is up a sensational 150 per cent and Air France-KLM an even more sensational 171 per cent. Investors who thought vicious competition would ensure that European airlines would be forever doomed to destroy capital were wrong. North American airlines are also reaching for the heavens. Air Canada reported a record second-quarter profit of $300-million and its shares have gained 124 per cent in the last year.
Driving the spectacular airline performance is the improved economy on both sides of the Atlantic and the airlines' obsession with cost cutting. Full-service carriers like British Airways eliminated some practices, such as free checked baggage on all fares, and stuffed more seats in their planes so they could compete with the low-cost (or discount) airlines.
Waning competition also helped, especially in the United States, where a merger frenzy in the last decade turned the Big Eight airlines into the Big Four – United Continental, American Airlines, Delta Air Lines and Southwest Airlines.
They have formed a classic oligopoly that has allowed average fares to rise as a small number of airlines came to dominate some of the biggest U.S. airports, reducing consumer choice. According to the Associated Press's analysis of airport data collected by airline tracking firm Diio Mi, a single carrier controls a majority of the market at 40 of the top 100 U.S. airports. That's up for 34 airports a decade ago. At 93 of the top 100 airports, only two airlines control a majority of the airline seats, up from 78.
Europe seems to be entering a consolidation phase, though it has a long way to go before concentration approaches American levels. The British airline intelligence company OAG says Europe operates more airlines – some 217, more than double the American number – than any market in the world. The top six U.S. airlines control 90 per cent of domestic capacity. In Europe, the top six control only 43 per cent of capacity.
Driving consolidation in Europe are the low-cost carriers, which barely existed 20 years ago and now control about 40 per cent of scheduled services. Besides Ryanair and easyJet, they include Wizz Air, Norwegian and Jet2 (in the United States, the low-cost stars are Southwest Airlines and JetBlue Airways).
Monarch tried to transform itself into a low-cost, short- to medium-haul airline a few years ago. It had always concentrated on the leisure market and Turkey, Egypt and Tunisia were among its most popular destinations. When political unrest and terrorist attacks made those destinations no-go areas, Monarch focused on Spain and Portugal, where it ran smack into Ryanair and easyJet.
Monarch could not compete. In the year to October, 2016, it lost £291-million. Its load factor was only 78 per cent, compared with Ryanair's 97 per cent. Airlines have high fixed costs – a plane that is nearly empty costs almost as much to operate as one that is full. "To be profitable, low cost airlines have to have high load factors," said Ms. Cooper. Monarch's owner, the private equity firm Greybull Capital, and its aircraft supplier, Boeing, pumped an estimated £165-million into Monarch to try to keep it alive, to no avail.
The big European airlines can only be happy that Monarch is dead and that Air Berlin and Alitalia are dying. Ryanair CEO Michael O'Leary said in August that only five European airlines will survive in five years. "We are clearly going to play a role in the consolidation of the European airline industry, given that we're the biggest airline in Europe," he told Reuters.
If he's right, the European airline industry will look a lot like the American one – a few big airlines owning most of the market. Investors will cheer, but the golden age of cheap European air travel may be coming to an end as competitors vanish.
Eric Reguly