A Dark Future for Europe’s Legacy Airlines

Over the last decade, Europe’s big three airline groups, IAG (owner of British Airways/Iberia), Air France/KLM, and Lufthansa Group, have all been in much better shape than their American counterparts. While US airlines floundered and filed for bankruptcy, they grew and became stronger. But now, the tables are turned as a variety of different things are conspiring to make life very difficult for the European legacies. So far, the response has been the same failed strategies we’ve seen before on this side of the Pond.

European Three Amigos

One of the biggest problems these airlines face are their own governments. As much as I complain about the state of the US government’s approach to air travel, Europe is much, much worse. Some of this is on the macro level with the European Union’s much criticized carbon trading scheme. Some, however, is country-specific.

The poster-child for terrible government policy is the United Kingdom. Not only has the country levied some of the harshest taxes ever seen in aviation (the UK Air Passenger Duty is now approaching £100 on some tickets), but it fundamentally refuses to add capacity in London where it is needed most. Discussions around a new runway at Heathrow or a new airport way out in the Thames estuary remain just that – all talk and no action. We won’t see any sort of capacity increase there for decades, and the country has already begun to suffer the effects.

Bad government policy isn’t unique to the UK. Germany has begun to stab itself in the heart with airport curfews. The biggest impact is felt in Frankfurt, where night flights have stuck a dagger in the air cargo market. (In the first three months of this year, air cargo at Frankfurt dropped more than 10 percent.) There is also over-taxation there and in most other European countries.

Fighting Low Cost Carriers With Familiar Strategies
This wouldn’t be an issue if there were no competition, but of course, there is plenty. For flights within Europe, low cost carriers have only grown stronger. Though they deal with the same governmental issues, they have operating costs far lower than the legacy airlines and they can profit with much lower fares. Does this sound familiar? It should, because it’s what happened in the US.

You’ll recall that over the last decade or two, US airlines tried all sorts of things to become competitive. They opted for “airline-within-an-airline” low cost carriers that all were complete failures. They’ve looked at b-scale wages over the years. They’ve had aggressive cost cutting campaigns. In the end, it was only Chapter 11 bankruptcy that allowed them to become more competitive. European airlines don’t have such a convenient option.

Instead, they are trying the same tactics that didn’t work in the US. IAG has started a low cost carrier in Spain called Iberia Express. Nothing is different except that the wages are lower so it’s a cheaper operation to run. Iberia employees are angry and striking, but it hasn’t stopped the airline from pushing forward. In Germany, Lufthansa has started to turn over more short haul flying to its low cost subsidiary Germanwings. Most of Stuttgart flights, for example, are now flown by Germanwings instead of Lufthansa. The French are also plotting a strategy to shift short haul flights to a low cost carrier.

The shorter distances within Europe as compared to the US make this an even more pronounced problem since people on shorter flights care less about the difference in amenities. For most legacy airlines, however, they can take solace in the fact that in the long haul world, they are still king.

Trouble in the Gulf
Traditional low cost airlines have tried and failed many times on long haul routes. The most recent was Air Asia X which canceled all of its European services. That has been the saving grace for American carriers, which have made major efforts to shift the balance away from domestic flying toward long haul. This is good for European airlines because they have traditionally had more long haul flying than short haul as compared to the US carriers.

But there’s a big problem in Europe: the Gulf carriers.

A whole host of airlines in the Middle East have sprung up with luxury service combined with lower fares. The pack is led my Emirates, which still is planning on filling about 100 A380s a day in addition to its massive fleet of 777s. Etihad in Abu Dhabi along with Qatar Airways in Doha and even Turkish in Istanbul have flooded Europe with cheap capacity thanks to lower costs.

This has created major headaches for European airline flying to Asia and Africa. While Emirates and the like don’t fly the routes nonstop, they have good, fast connections that draw away a ton of traffic. Lufthansa alone has seen this erode profits to the point where it has pulled flights to Hyderabad, Kolkata, and Guanghzou. Nanjing, Chennai, and Bangkok are now on the chopping block.

While European airlines had been relying on government intervention to keep these big guys out, that won’t work forever. At the Phoenix Aviation Symposium in March, IAG chief Willie Walsh said that he was downright jealous of the Middle Eastern carriers because they have governments that believe in the importance of aviation for economic growth. They help the airlines and provide good taxation environments to help them grow.

And grow they have. Emirates has six daily flights from Heathrow to Dubai (4 on A380s) and two daily 777s out of Gatwick. But even more importantly, Emirates flies to smaller cities like Newcastle, Glasgow, and Birmingham, providing better flight options than even BA can offer to those folks.

That leaves the European airlines in a good position only to the Americas. No low cost carrier has found a way to make that work (though many more will try and fail). But in the US, they have formed joint ventures with their American counterparts. American carriers are much more likely to take on upgrades and lower fare traffic. That puts pressure on the European carriers and their often superior options when the revenues end up being shared.

Problems are Easy, Solutions are Hard
This post has been easy for me to write because I just talk about the problems and don’t have to come up with solutions. That’s the hardest part of all and it’s what the European legacy carriers struggle with every day. If I knew what to do, I’m sure I’d be a rich man.

Does that means there’s no solution? Of course not. But it’s not a simple problem to solve. These airlines see tremendous pressure in nearly all parts of their business. With the governments not interested in budging on their terrible policies and labor not seeing the reality of the cost problem, it’s going to be tough to make much progress.

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47 Comments on "A Dark Future for Europe’s Legacy Airlines"

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Sanjeev M
Guest
Yes LH has a cost problem, but its still making tons of money. AF not so much. I can’t speak about China but for India, North America is more important than Europe. And sometimes its just about schedule. Most all the Europe carriers arrive and depart around 1am with Gulf carriers at 4am. The major exception is Emirates who have flights at all times of the day and more importantly connections to get there. I can leave India at 9pm and be at JFK or DFW in the morning. As EK gets into North America more, I can see LH… Read more »
SunilDewan
Member

When did AF quit India? Both AF and KL offer flights to India; AF serves DEL, BOM and BLR whereas KL serves DEL and code-shares with DL to BOM.

Sanjeev M
Guest

DEL and BOM is token. Every carrier under the sun serves DEL or BOM. Yields are pretty low so it probably doesn’t add much to the bottom line. I meant to say that AF has reduced a lot from where it was 15 years ago.

Bobber
Guest
Expanding LHR isn’t the only option for the UK, Cranky. Had successive governments had a modicum of intelligence in terms of a coherent, joined-up transport policy, then expansion of airports in the midlands (BIR) and north-west (MAN) would have added capacity – a decent rail-link between these cities and London would have got around the apparent geographical disadvantage. The fact is, outside of London, there’s a lot of space left! I don’t think the estuary airport will be realised, but I also think the Heathrow should never have been developed where it was (after all, it used to be some… Read more »
David
Guest

About 7 years ago, Michael O’Leary made a few predictions. These included:
1 – Europe would consolidate into 3 megacarriers
2 – British Airways would drop all routes from anywhere other than London
3 – Some Eastern European carriers would go bust
4 – Only 2 true LCCs would survive in Europe
5 – British Airways would buy Easyjet

Predictions 1, 2, 3 and 4 have all come true. What’s the chance of number 5 coming true in a few years time ?

Zack Rules
Guest

Cranky

One huge advantage that EU carriers have is nonstop and large O&D markets. Those are great advantages but EU carriers don’t seem to realize them.

Do you expect to see an unbundling of the economy class product, similar to what we have seen in the US? The short haul already resembles this but do you see long haul doing the same?

David
Guest

The largest LCC is Ryanair, who have something of a reputation – a lot of people just won’t fly with them because the experience is so horrible (I’ve flown with them 100 times). If MOL decides to be nice to his customers (yes, a big if) and make Ryanair acceptable to people who don’t like his outfit, that would probably cause a lot more trouble for the legacy carriers.

One other aspect that you might want to consider – namely the LCC Norwegian up against LCC…

Southeasterner
Guest

Seems contradictory to reality.

Ryanair just announced record passenger numbers and profits.

David M
Guest

Ryanair and Spirit both do a lot of things that cause people to be very loudly angry with them. But both are doing quite well financially. From this, I can draw two potential conclusions:

1. A relatively small number of people can make a lot of noise.
2. People may talk say a lot about how terrible it was and they’ll never fly them again, but in the end, price wins every time.

Zack Rules
Guest

Interesting point, yes and no. Spirit has a history of going into markets and do really well until people fly them. The repeat businesd is not there, I would curious if that was still the case. Port Au Prince, Long Island, Sanyo Domingo and a few others come to mind. That is why JetBlue has been eating their lunch at FLL.

Simon Wilson
Guest

BA is just too London fixated as well, it used to have some good MAN US flights but no longer, you have to go through LHR. So from MAN you can go MAN-LHR-somewhere or equally MAN-DXB-somewhere (and EK even make the A380 into MAN)

Sean S.
Guest
The Gulf carriers survive off hub operations, but the question is, as planes such as the 787 roll out and are put into flight allowing for longer and thinner routes, how important will that be? The reality is that the same kind of high-end customer that the Gulf carriers are serving through their hubs are the same ones who prefer non-stops. Theres also the political question: what Cranky fails to mention is that the reason why there is no redtape in these countries is because, well, they are ruled by various forms of royal decree or a variety of powerful… Read more »
David SF eastbay
Member

The European Union would have to ban together and say no more LCC’s, and set tariffs. They can only do so much to keep other airlines out without hurting international relations between Europe and other countries of the world.

None of the above is about to happen, but they need to get some common brain cells working together. It may be the European Union, but it still is different countries with their own domestic issues and trying to be better then the rest.

Oliver
Guest

“They help the airlines and provide good taxation environments to help them grow.” (Willie Walsh quote)

That may be true, but they also have a huge revenue stream from oil that makes it affordable for them, so they can afford to invest into other industries.

Oliver
Guest

Cranky, do you think that Emirates will really be able to fill all those A380s profitably? Are there enough destinations in the world that warrant that kind of capacity (and the 777s aren’t exactly small either).

DesertGhost
Guest

I wonder what U.S. airlines would look like if they had the same bankruptcy rules as most other countries.

Andreas Schürrle
Guest

For European domestic flights there’s an even harder competition to the Big Three than low cost carriers: High-Speed Trains.

Already bullet trains have made flights between FRA and DUS, FRA and CGN obsolete. FRA to MUC the train is faster, FRA to PARIS the train beats air on time, comfort and price…

And it’s the building of high-speed tracks that the governments spend all their money on – even money made on “air taxes”…

Dan
Guest

Cranky, can you elaborate on the following statement? I’m not sure what you mean by it. Who cares less about what amenities?

“The shorter distances within Europe as compared to the US make this an even more pronounced problem since people on shorter flights care less about the difference in amenities.”

Bill from DC
Guest

The three european airlines are each an integral member of one of the three airline alliances.

Each of the middle eastern airlines are not involved in alliances.

How will alliance membership or lack thereof affect this european / middle eastern competition going forward?

Jim
Guest
From the point of view of society, using airlines to promote economic growth might not be such a good thing. European airlines may be jealous that Middle Eastern airlines can do whatever they want without government interference. But the flip side of that is that Middle Eastern workers are being oppressed, working for little pay and few rights. The environment is polluted, and no one cares. There is no democracy, so anyone who speaks up is quickly dealt with. This is very similar to Chinese manufacturers who steal contracts from American manufacturers by offering lower costs. However, the Chinese public… Read more »
Marks
Guest
Cranky, Some weeks ago you wrote that fleet management is one of the most important jobs that airline management has. I would suggest that this is correct advice, and is analogous to the advice given to pilots when in some sort of trouble at 30000 feet – ‘Fly the plane!’ There are all sorts of other issues such as payroll costs, but when in trouble as they are now, legacy carriers should ‘fly the plane’ by making sure their fleet management is right. Consider this: One of the Airlines you have mentioned in this article, Emirates, has a modern long… Read more »
Trent880
Guest

Where would QF flow all those passengers too if they bought a fleet similar to EK? Even if QF could lower their labor costs by outlawing unions and limiting the amount of time FAs can serve, they still couldn’t run a fleet similar to EK–it’s geographically implausible.

Marks
Guest
Hm, I am not quite sure what you are saying. Qantas is not suffering from overbooking in its Kangaroo route from Australia to Europe afaik – in fact it has reduced services with its 747s. That tells me that it has overcapacity. Given that, why would replacing 747s with 777s cause a problem? It didn’t cause SK any problems on pretty much parallel routes to Europe and within Asia – big market for both airlines. I am not sure what you mean here. Geographically implausible? Not sure what you mean here either. QF runs long haul to Europe via SIN… Read more »
tharanga
Guest

Many of the things you describe as terrible government policies apply to Emirates flights out of Europe too. ETS, duties, etc – all market participants are subject to these things (and given how ETS starts up, it’s insane to blame it for anything yet). and limits on LH’s dedicated cargo operations have little to do with people-carrying flights, outside of dedicated cargo providing some diversification.

Luke
Guest

A great piece Cranky, thank you. I hope you get as much pleasure from writing them as I do reading them!

barbismike
Member

The UK flight taxes are out of control. I used to always transfer thru LHR but no longer — those flights just aren\’t competitive any longer. So, yes, the UK government did kill that business. I recent flew from JFK to CPT thru IST and it was terrific! I would definitely do it again (great service, new planes, easy transfer with minimal security) and saved money in the process. Go THY

Trent880
Guest

There’s plenty of schadenfreude watching the EU carriers go through the same challenges/joys/horrors of deregulation that the US carriers have been going through at least a decade longer. Starting a carrier-within-a-carrier? Good luck with that. Think people will pay a premium for a meal in economy? Nope! Want a dozen hubs with in a 500 mile radius? Not gonna work for long! And Asia is next on the deregulation hit list, so don’t get too comfortable over there. Soon everyone can enjoy the US level of service in their very own country!

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