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Routes News

17 Apr 2018

BY Gary Noakes

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TRFBLI

European ruins: What to expect from Europe’s air industry

Were a couple of collapses in the arena a portent of things to come, or the result of special circumstances?

Colosseum in Rome at daybreak
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As we look ahead to the summer peak, what can we expect? Was this a portent of things to come or a series of unique events?

Last year, the industry mourned the collapse of two airlines and the bankruptcy of a third, with Monarch and Air Berlin disappearing and the Alitalia saga rumbling on.


As we look ahead to the summer peak, what can we expect? Was this a portent of things to come or a series of unique events?


The evidence points to the latter in all three cases. Last summer, Monarch found itself in an impossible position. Squeezed by bigger, lower cost rivals, locked out of Egypt and Tunisia and with Turkey floundering due to the perceived terrorist threat, Monarch was forced to do two things.


First, it had to shift capacity into Spain and Portugal, which meant fighting with the likes of easyJet, particularly at Gatwick. The race to the bottom meant bargain-basement fares, but even these became difficult to shift if UK customers had to buy accommodation. With North Africa off limits and wariness about Turkey, hoteliers faced huge demand from markets like Russia. Britons were forced to pay inflated rates and the post-Brexit-referendum pound, worth around 15% less, priced them further out, even with budget flights.


Second, Monarch had more aircraft than routes to fly and made some ill-advised choices, including launching Manchester-Stockholm, while its attempt to offer Tel Aviv city breaks were hampered with every terrorist attack in Israel or Palestine.


After the inevitable collapse came a legal battle that cleared Monarch’s slots to be sold. Wizz Air bought up the Luton portfolio, adding two aircraft and 23% more capacity, including routes to Bari and Reykjavik – far away from the melee in Spain and Portugal.

 

Slotting right in

Monarch's Gatwick slots went to British Airways, increasing its capacity there by 28%, with 285 weekly summer slots and 106 in winter. BA’s defensive move saw off Norwegian Air, with Norwegian’s CEO Bjørn Kjos admitting he could not fill them and would have fallen foul of the “use it or lose it” rule. “Of course we could have picked up Monarch’s slots, but you have to serve them; we would have lost a lot of them,” he says, adding that cost was another factor.


BA had already planned two long-haul launches from Gatwick (Las Vegas and Toronto) this summer, but perhaps surprisingly given Norwegian’s threat, chose only to expand short-haul after the land-grab, adding Monarch’s former destinations like Gibraltar, Palma and Mahon and increasing frequency on existing BA routes like Malaga, which rose from 27 to 35 a week. ACMI specialist Titan Airways will fly some of these routes, as BA does not have enough of
its own aircraft.


Given the timing of the slot purchase in November, it was too late for BA to launch a swathe of new summer long-haul routes, so some slot filling appears to have taken place. It may all change next winter, with more long-haul flights beginning.


Meanwhile, some might say BA has just replicated a situation in which Monarch did so badly. Putting more capacity into the western Mediterranean as the eastern Med reopens may be a gamble that sees more rock-bottom prices as summer progresses, but BA, unlike Monarch, does have pockets deep enough to see the fight through to next winter.


Then the real battle may commence if BA decides to take on Norwegian and add long-haul capacity. Norwegian’s Gatwick long-haul fleet will increase from eight to 12 Boeing 787s this year, with Kjos having said he could “easily fly 20” Dreamliners from the airport. Neither airline will want a price war, particularly Norwegian, which saw a net ¤27.4 million loss last year.

“There are a couple of spots where we see there may be too much capacity, particularly between Europe and North America where it is up just under 10% year-on-year in a pretty mature market,” says OAG senior analyst John Grant.


“Norwegian has announced more frequencies and we have LEVEL, JOON, TAP and Aer Lingus all adding a bit more, plus Iceland’s carriers. It will be interesting to see if there is sufficient demand to North America, particularly with the exchange rate and the drop in leisure traffic since the election of Donald Trump.”


However, Grant does not see another apocalypse coming, at least not this summer. OAG research shows the number of scheduled flights this summer across Europe has increased by just 2% to 5.66 million and the number of seats by 3.5% to 891 million.


“In Europe, there is probably a good balance between capacity and demand; Turkey and Greece are coming back, so perhaps the shift we saw to Spain and Portugal will balance out,” he says, but adds a cautionary note that fuel is 25% more expensive now than a year ago and that any significant further increases might have an effect later on.


On continental Europe, last year saw the demise of Air Berlin and, yet again, Alitalia’s slide into bankruptcy.


Like Monarch, Air Berlin was a problem child, trying to be all things to all people and getting its fingers burned whatever it did. Pitching to discount leisure customers without a low cost base was never going to work, and with that image then attempting to attract premium long-haul travellers was a recipe for disaster.


Etihad bought a 29.2% share in Air Berlin in 2011 to gain a foothold in Europe’s biggest market and pumped money in until it saw enough was enough. The Abu Dhabi-based bankroller has now ceased being a contributing disrupter of the natural market. Under former CEO James Hogan it bought minority stakes in a handful of carriers, some of which would not have survived without it, so the 2018 landscape has now changed.

Efficiency problems

Efficiency problems

One airline that knows this only too well is Alitalia, which has tried to weather successive market shifts by not doing very much. In 2014, Etihad bought 49% of Alitalia, promising “sustainable profitability from 2017”, but with the Arab benefactors shutting the chequebook, Alitalia’s fate is now in its government owner’s hands.


Overstaffed and inefficiently run, Alitalia has soldiered through successive crises for decades. Assuming an investor like the Air France, KLM and Delta Air Lines trinity or easyJet emerges, there will have to be radical changes, particularly now another Gulf investor has entered the coliseum of Italian aviation.


Into the arena comes Qatar Airways, which has been a more successful investor than Etihad. Last September it bought a 49% stake in Sardinia-based Meridiana and within five months changed the name to Air Italy, complete with Qatar maroon livery. Qatar’s plan is to move from 11 aircraft (including three wide-bodies) to 50 by 2022, adding five Airbus A330-200s from its own fleet.


As well as launching Milan to New York, Bangkok and Miami, Air Italy is also moving capacity into the hotly contested domestic network, where easyJet and Ryanair have caused so many problems for Alitalia.


Earlier, Norwegian had also sniffed weakness, making Rome Fiumicino a new long-haul base last winter with three routes, including Newark. For those trying to sort out the Alitalia mess the prognosis is not good, particularly as Italy’s GDP growth, at 1.7% in the third quarter of 2017, is not spectacular when compared with Germany’s 2.8%.


Alitalia, when it re-emerges in whatever form, will have to work hard, but otherwise, there seem no other major causes for concern across the industry in 2018.


“The top three-quarters [of Europe’s scheduled airlines] are pretty solid. I’m confident they will still be around,” says Grant. “I don’t envisage seeing another Air Berlin or Monarch incident in 2018.”

The changing players

Bowing out...

OpenSkies: British Airways’ once all-premium carrier flying to New York from Orly will cease to operate at the end of summer 2018. The niche carrier, which now offers an economy section, will give up its slots to IAG’s budget brand LEVEL.

 

Darwin Airline: The Swiss regional brand ceased operations in December, having been part of the Etihad group.

 

Powdair: This niche start-up venture flying from Switzerland’s Sion Airport to various UK and European airports failed to get off the ground last winter, but will make another attempt in 2018/19.

 

Entering the stage

JOON: Air France/KLM’s new hybrid began with short-haul flights aimed at millennials but will offer Tehran, Cape Town, the Seychelles, Cairo and Fortaleza from Charles de Gaulle this summer.

 

LEVEL: IAG moves into Orly this year, having launched in Barcelona using Iberia aircraft. The airline’s fleet will comprise five Airbus A330s this year, with talks under way to acquire another 10 by 2022.

 

And making a comeback

Niki: Air Berlin’s Austrian leisure brand was the target of a Lufthansa bid, but this was blocked by the European Commission on competition grounds. IAG then attempted a deal in December, planning to give Niki’s aircraft and slots to Vueling. This was rejected in favour of a purchase by former racing driver Niki Lauda, who founded the carrier in 2003.

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