A Dark Future for Europe’s Legacy Airlines

Air France, British Airways, Lufthansa

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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48 comments on “A Dark Future for Europe’s Legacy Airlines

  1. 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 reduce more even though India has been its traditional strong point. AF quit India long time ago and BA is holding steady thanks to strong UK demand and historical ties. E.g. BA started HYD in 2008 I think and not 2 years later LH is out. CCU was a disaster for all Euro carriers. I believe that Chennai manages to hold on to BA 5 weekly and LH due to decent profit on cargo.

    We’ll see what happens. Otherwise look for Qatar to up frequencies and Turkish to start a couple new India routes to build up their connecting banks and challenge EK.

    1. 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.

      1. 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.

  2. 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 pigs-knuckle airfield that happened to be convenient for development). Emirates’ policy of regional departures is sound – BA probably can’t compete on all of those routes, and now it has T5 at LHR, probably doesn’t care. Yet.

    1. Bobber – The UK might not be all about London, but London is an enormous percentage of what matters there. There isn’t a shortage of capacity elsewhere in the country now so I’m not sure what would really help with development in those areas except for an improvement in connectivity on the ground along with lower aviation taxes to stimulate demand. But in the end, it really is London that matters most.

      1. I don’t disagree with you, Cranky. The fact is, expenditure on things like the high speed rail link between London and Birmingham is shutting the stable door after the horse has bolted. Investment in rail infrastructure is probably 40yrs too late – the ground connectivity that would support expansion at eithe Birmingham or Manchester airports will probably never materialise. Which leaves heathrow, really. I suspect, somehow, a third runway will materialise – they could get creative and develop Northolt to the north (5 or 6 miles) and use that runway for short haul destinations, linking the airport to heathrow and central London.

        But that won’t happen…..

  3. 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 ?

    1. David – If BA buys easyJet, it’s wasting its time. Any time a high cost airline buys a low cost airline, the result is never good.

    2. With regards to #5, British Airways has bought the slots, if not the routes, from Easyjet that mattered.

  4. 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?

    1. Zack Rules – I agree. The nonstop vs connect option is huge, but there are other issues.

      Emirates has so many flights that while a European airline might have one nonstop a day, Emirates may be able to offer three different connecting options at various times of the day. So the frequency helps offset the connection.

      Regarding unbundling, I have no doubt the airlines would like to do that, but it is all a very cultural issue. Whether or not each of these airlines can successfully go to that model remains to be seen, but they should probably at least experiment with the idea. (Heck, BA has done it for years by charging for seat assignments on long haul…)

      1. Well BA has been doing the same in North America, usually being one of the few international options at many of its airports. I agree BA dropped the ball on Eurasia. They could have run some old 767’s from regional UK to Amman and passed them on to oneworld partner Royal Jordanian. Also, as Cranky said the UK Government doesn’t help either.

        I would like to see airberlin increase its UK feed to siphon regional passengers away from congested Heathrow.

  5. 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…

      1. 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.

        1. 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.

          1. Zack – I don’t see how you can say JetBlue is eating Spirit’s lunch. JetBlue should be getting higher fares because it has a premium product. It has a higher cost base and needs to generate more revenue to pay for it. But Spirit is doing quite well there. And my understanding is that there’s plenty of repeat business.

  6. 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)

    1. Simon – Well, the reason BA stopped the Manchester US flights was because the airline couldn’t make them work financially. But now BA does have them back in a way. Its joint venture partner American does Manchester to both Chicago and New York.

        1. Yes they did. I think it was pulled in the last couple years at the latest. The idea was to feed United at its hubs, but it just didn’t work. Even tried 757s at one point for shorter flights.

  7. 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 elites that control the economic and political lives of those below them. As evidenced elsewhere in the Arab world, how much longer can countries like Bahrain/UAE/Qatar afford such reigns in the face of rising unemployment, youth demographics, and influence from Western money?

    This isn’t to start a political debate but it is to raise serious questions about the economic sustainability of investments in the long-run in many of these countries. In many cases there is nothing approaching an independent judiciary, there are at times opaque rules around foreign investment, and as a number of rather unfortunate Britons have figured out lately, vacationing in Dubai isn’t the carefree environment of say, Ibiza.

  8. 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.

  9. “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.

  10. 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).

    1. Oliver – I’m skeptical about Emirates’s ability to fill all those airplanes. But then again, I can’t believe they’re as big as they are now.

      1. What would you rather travel in, a new Emirates A380 or B777 or an old legacy B747?

        Not that hard to believe if you have a trip of twelve hours or more overnight.

    1. DesertGhost – Without bankruptcy, US legacy carriers would be gone and newer ones would have had to form to take their place at some point. At least, that’s my guess.

      1. I should have made it clear that my question was rhetorical. Having written thiat, I completely agree with your reply. To me, it would have been the only possible outcome.

      2. Depending on the country, insolvency laws aren’t terribly different; the UK has both CVAs (similar to Ch 11), and “prepack” administration, where the company can often continue as an ongoing concern (but with new owners and no debts). The US would likely have many of the same names flying.

  11. 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”…

  12. 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.”

    1. Dan – What I mean is that people care less about amenities on shorter flights, so they are more willing to tolerate someone like Ryanair. In Europe, the flights are shorter than in the US in general, so there is going to be more willingness for people to fly on barebones operations.

  13. 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?

    1. Bill – There has been talk about some middle eastern airlines joining alliances. Turkish is in Star and there’s been talk about Etihad and Qatar. Emirates seems to be the one firm holdout at this point.

  14. 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 pays for it by breathing polluted air and working in hazardous conditions with little pay.

    1. Jim – We’re looking at extremes here. This isn’t an issue of the European airlines wanting to do anything without government interference. It’s an issue of the realization that aviation helps promote economic growth and it shouldn’t be punished for that. Governments should be encouraging economic growth and that doesn’t always have to result in environmental destruction or the disappearance of human rights.

      1. No, but those last two things are only possible in a society whose political system is relatively free and open. We all complain about NIMBY’s, land-use issues, environmental studies, etc. etc. but I’d much rather have that then any organization, be it an airport commission or development company simply ramrodding whatever it wanted. You can complain about unions being unrealistic with their demands, or striking, but the reality is that those are hard-won rights that we have in this country for better or for worse.

        The Gulf carriers are, like their host countries, built mostly on sand. Their workforce and executives are often imported from elsewhere, their “advantages” in infrastructure are the result of largesse of the state that owns them, and they mine a vein of hub traffic that is open to competition from , well, anyone else, including Indian carriers and others in S.E. Asia. Unlike many legacy carriers, they have no built in domestic traffic (which I know applies less to European carriers than Americans), and what interest there is in those countries economically is again based on a very large amount of largesse on the part of the state and dodging tax and labor laws in other countries.

  15. 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 haul fleet of A380 and B777 with low aeroplane fuel burn and maintenance costs. Qantas, on the other hand, a long haul competitor, while having a small fleet of A380s still runs a huge number of elderly 747 and 767 planes. (The 767 is still used for longer intra asian flights of seven hours or more).

    Similarly, Qantas has ordered a number of 787. However, management did not have a ‘plan B’ in case deliveries were late. Surely it is not hindsight to know that new planes always have some delivery slippage, and new technology also has delivery slippage, and the combination of new plane and new technology slippage ALWAYS has slippage. While management did not cause the delay in the 787, sure as hell could have anticipated it – no hindsight required, and had a plan B in place. They did not. Fleet management Fail.

    Yet, rather than focus on technology and working smarter to achieve outcomes (and working smarter is what made the US economy great in the 19th and 20th centuries) by smart fleet management, as you point out these legacy companies are trying to get by with old equipment and focus on driving down wages. Well, I guess most US companies, be that GE or Boeing or Ford made their initial money by being smarter and providing a better product than the rest. In doing so, they often LED the market in providing wages and conditions just a little ahead of their competitors (they were not philanthropists by any means, but a few cents an hour better than their competitors often gained them a few percent in productivity).

    So, perhaps the legacy airlines could take some of that comment you gave a few weeks ago in one of your postings Cranky. Running clapped out old planes against a modern fleet such as Emirates, and concentrating on alienating staff by cutting conditions seems backside first. What do people think about delivering a modern low fuel burn and overhaul cost fleet first, THEN look at various forms of staff economy? (Note, I am not saying don’t look for serious payroll savings, merely that they should ‘fly the plane’).

    The legacy carriers like Qantas have relied on trying to manage their shareholders, cut staff costs, boost PR, do wonderful stuff with computer systems etc rather than fly the plane imo.

    1. 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.

      1. 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 and BKK from Australia. So does EK. EK runs similarly from Africa. SK does as well, they no longer have 747s at all. Can you expand on the geographical implausibility?

        Of course, QFs domestic operations (which are heavily supported by Government regulation making it hard for international carriers to compete domestically) are another matter. Its domestic operations, being supported by regulatory barriers, are very profitable. As such, since the article by Cranky was about airlines having a hard time, I was not including the very profitable Australian domestic operations in my comments. Sure, an EK fleet mix would be stupid domestically. Even then though, they are still running elderly 767s in the domestic fleet, and could still make some improvements.

        Finally, I still stand by my statement that QF should have anticipated late delivery of the 787 and planned for it. The combination of new aircraft plus new technology has “delay” stamped all over it.

  16. 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.

    1. tharanga – My post is not suggesting that everything is tied together. The point is that there are issues hitting the airlines from many different sides.

      Yes, other airlines flying to the EU have to deal with the carbon trading scheme, but you’ve now given an advantage to the likes of Emirates carrying people from the US to India or Africa. It makes Europe less competitive as a connecting point and that hurts flight options in Europe.

      Regarding cargo, it’s just another piece of the airline’s business that is under pressure because of ill-advised policies.

  17. 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

  18. 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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