Mergers and Consolidation
1,360 total articles
174 total articles
Part one of this report on European airline market structure and consolidation highlighted that the top twenty airline groups in Europe hold 75% of seats. This is the same share as the top six groups in North America. This equivalence, in market share terms, between Europe's top 20 and North America's top six underlines the huge gap in consolidation progress between the two regions' airlines. It would take a large number of merger and acquisition deals to recreate North America's market structure in Europe, consolidating 20 into six.
This second part of the report is a kind of fantasy, a hypothetical. It suggests an illustrative series of combinations among Europe's top 20 that would approximately replicate the market shares, in terms of seat share, held by North America's top six.
This would require large merger and acquisition transactions involving pairings between members of Europe's smaller top six of Lufthansa Group, IAG, Ryanair, Air France-KLM, Turkish Airlines and easyJet. It would also mean several deals involving second-tier FSCs and LCCs. However, for now the larger deals in Europe remain relatively unlikely, and there are even hurdles to the smaller deals.
Consolidation among Europe's airlines has always been fitful, and truly sizeable deals have ground to a halt in recent years. By comparison, North America has become the benchmark of airline consolidation progress. The announcement that Alaska Airlines is to acquire Virgin America once again highlights the differences in pace between Europe and North America.
This first part of CAPA's analysis of European airline market structure and consolidation compares market concentration in Europe with that of other world regions and looks at the link with profitability. It mainly focuses on comparing Europe with the other two large aviation markets, North America and Asia Pacific, but also gives data on market concentration for all of the other regions: Middle East, Latin America and Africa.
Europe's fragmented airline market is less profitable than its much more consolidated North American counterpart (although, on most measures, Europe is less fragmented than Asia Pacific). Europe's top 20 airline groups have the same seat share as North America's top 6.
Part two of this report considers a possible set of combinations to reassemble Europe's top 20 into six groups matching North America's top six.
There has never really been a consensus on the question of what defines success in the airline industry. However, that now seems to be changing and opinion is coalescing around the idea that financial performance is the best demonstration of success.
Chapter 11 bankruptcy, followed by consolidation has helped profitability in North America, but this process has slowed to a trickle in Europe’s more fragmented airline sector, forcing each European airline to devise its own formula.
Judging by operating margins in 2014, European Low Cost Carriers (LCCs) are enjoying greater success than Full Service Carriers (FSCs). Unit cost analysis highlights the continuing CASK gap, emphasising the imperative for cost efficiency, and also allows a more detailed strategic segmentation of Europe’s airlines. Ultra-LCCs seem particularly successful, but one of the keys to LCC success is to have pan-European operations.
The last of Europe's stock market-listed airlines recently reported financial results for 2014, providing the opportunity to compare levels of profitability. Ranking them by operating margin, there is a wide range of performance from healthy double digit to negative figures.
LCCs typically performed better than legacy airlines. Most of the higher margin airlines improved in 2014, while most of those at the lower end of the scale suffered a fall in margins. Convergence of business models does not show itself in convergence of financial performance.
Beyond the listed airlines, Europe has a large number of mainly small and unprofitable airlines, which drag down the aggregate margin of the continent's airline sector. Europe's traffic growth and load factors are relatively healthy by world standards, but its margins are held back by its fragmented market structure.
Long considered, perhaps unfairly, to be the ‘bottom feeder’ of the air transport business, the global airport ground handling business is now estimated to be worth over USD80 billion per annum according to its trade association, ASA - while some say USD100 billion.
By comparison the airline industry turned over around USD700 billion in 2013.
Ground handling’s status may be growing but this particular business segment has unique issues that frequently dominate its agenda.
Part 1 of this report deals with the impact of liberalisation, the counter-intuitive inefficiency of multiple ground handlers and the recent UK Supreme Court's potentially disruptive decision on claims for delayed flights. Part 2 will review the consolidation of the ground handling industry and emerging alliances.
The new ultra low-cost airline competition is more aggressively probing the soft underbelly of established pricing at Cleveland and Cincinnati as Spirit Airlines plans to enter the Cleveland market in early 2015. Spirit’s moves follow a rapid expansion by fellow ULCC Frontier Airlines in Cleveland after United dramatically downsized its smallest hub by cutting roughly 60% of its daily departures from the airport.
Now that Spirit plans to introduce flights from Cleveland, the market is also set to become the most visible test case of the US market’s ability to support two ultra low-cost airlines. Spirit and Frontier will compete on most of Spirit’s new routes from Cleveland alongside major airlines.
It is also Spirit’s most blatant competitive response to Frontier since Frontier was purchased by former large Spirit shareholder Indigo Partners. Spirit has offered little public comment about Frontier’s transition to the ultra low-cost model Spirit pioneered in the US roughly a decade ago; but perhaps Spirit’s network moves speak volumes about how it views a new ULCC entrant in the market place.