Who wins and who loses in the free aviation market

They can't spend two years and the editors find themselves having to dust off the adagio: this time it's Thomas Cook's turn. More than 170 years of activity conclude in another repatriation operation and in a cloud of titles– photocopy of those of 2017.

The numbers of a crisis

It is not only the United Kingdom that is affected by the end of historic brands: across the Alps, Aigle Azur and XL Airways brought the books to court a few months ago; beyond the Rhine the collapse of Air Berlin in 2017 preceded that of Germany, which occurred in 2019. At least 45 airlines have closed their doors since 2010 in the EU alone, with a decisive surge in the last two years: thirteen closures.

Something is happening in the skies of Europe. Despite the growth of double-digit passengers, the number of carriers in trouble is increasing. Why? The answer could be in a phenomenon, that of Consolidation, which distinguishes competitive markets. To understand something more we look overseas, towards that country that, for better or for worse, all economies end up more or less copying. The United States of America.

Between 1979 and 2012, in America, there were 194 between bankruptcies and bankruptcies in the air transport sector, for an average of almost 6 per year. What unites the American and European experience is the transition from a plastered and fragmented situation to a market in which there is free competition. In the United States the merit was dell'Airline Deregulation Act of 1978 while Europe followed a gradual process, with a series of measures issued between 1987 and 1992 (subsequently collected in Regulation 1008/2008). Regardless of the method, the result was the same: expansion of air traffic and reduction rates for travelers.

The other effect of competition that has come about in America is the competition between carriers, in which, as Darwin would say, only the strongest survive. In less than forty years, the struggle in the American domestic market has meant that three quarters of passengers fly with four companies: Southwest, United, Delta and American Airlines. The chart below also shows the ways – mergers, mergers and acquisition of assets from bankrupt companies – which have meant that the US domestic market has become a de facto oligopoly.

"Oligopoly" is one of those terms full of almost always negative meanings. The picture, in this case, is not completely bleak: the competition on the most important sections has not come less, while the efficiency of the sector – if measured with factors such as the rate of filling of the aircraft, or the financial results of the companies – has increased. On the other hand, however, the Darwinian challenge that was fought in the skies of America had its victims: on all those airports that ended up on the margins, losing the status of hub. Pittsburgh, for example, has 20% fewer flights today than in 2003, at the time of the US Airways base; even worse it went to St Louis, where flights dropped 50% since the ex-TWA base was closed by American Airlines. In addition to the ex-hubs, rural communities and passengers lose out, for which the downward trend in tariffs has stopped in recent years.

Summing up, the post-deregulation American experience is made up of an ever smaller number of companies that are becoming increasingly large, of trades that are increasingly passing through specific hub e less through others, with potentially impacts negative on prices. Should we expect the same in Europe and, if so, can we say that the recent wave of closures is a first symptom of this evolution?

Consolidation in European sauce

The short answer can only be yes. Michael O’Leary, Ryanair's volcanic CEO (as well as a keen market observer) repeats from years that in the future, in Europe, there will be only five airlines. Trying to go further than the irrelevance of O'Leary, I focused on the nine most important names among the aforementioned 45 European airlines that have recently closed, trying to understand the impact of their closure on the markets they were serving .

The picture that emerges, summarized in the table below, is that all these carriers had an absolutely minority position in their countries of origin. The average number of passengers transported is less than 6 million (British Airways and Air France, to give an idea, move 40 million travelers / year). In none of these cases was the carrier's failure sufficient to cause a drop in passenger volumes in the countries in which they were based. Put simply, the system is losing marginal airlines and characterized by not very clear strategies (Air Berlin) or now no longer in step with the times (Thomas Cook).

Having seen who is losing the game of liberalization in Europe, it is time to ask who is winning. O’Leary talks about five companies, but my list includes two more: in random order we have Lufthansa, Ryanair, International Airlines Group, Air France-KLM, Wizzair, Easyjet and Norwegian. Seven different teams by nature (from groups like IAG, which bring together Iberia, BA, Aer Lingus, Vueling and LEVEL to low-cost leviathans like Ryanair) but united by a growth trajectory that marched faster than the market. The two graphs below show the growth of "Big 7"From two points of view: number of passengers transported in Europe and, in percentage terms, their market share within the same market.

The scenario painted by these two tables is clear: the market is growing (+ 50% between 2010 and 2018) but the "Big 7" run more (+ 89%), to the point of having reached 44% penetration of the European internal market (ie domestic flights and intra-EU28 and EFTA flights, namely Iceland, Switzerland and Norway). An upward trajectory that passes mainly through acquisitions (Vueling and Aer Lingus by IAG, Laudamotion by Ryanair) and taking over from failed companies (Easyjet in Berlin, Ryanair in Cyprus).

The future: half oligopoly?

Making predictions for the future is difficult and the risk of ending up in a meme of the Internet, like that IBM executive who predicted a maximum of five computers in the world, is always lurking.

Nevertheless, I try to hazard some hypotheses on the behavior of the European market in the years to come.

It is very likely that the next few years will bring new failures: the barometer of the global economy, in this climate of trade wars, marks bad weather. In the air transport market the companies are reporting a double problem: on the revenue side there is a reduction in revenue per passenger / kilometer, a symptom of an excess supply, and on the output side, oil is returning to rise. If the conditions were to deteriorate further, the most exposed carriers will find themselves in ever greater difficulty, with only two exit routes: the bankruptcy court or entry into one of the big seven.

Speaking of the great, it is not impossible to exclude that, in the future, their number is going to be reduced. They've been there for a long time doubts on the financial stability of Norwegian, whose debts are extremely high, and one wonders if three low cost / low fare companies are not too many for the European market. Ryanair, Wizz and Easyjet lived together for a long time without stepping on each other's feet too much, but the recent moves by the Irish in Central and Eastern Europe (groundwork in Poland, new flights to Ukraine and the Caucasus) can be a prelude to an expansion in the territory that, traditionally, is by Wizzair.

Will we get to American levels too, with four to five groups with 75% of the market? Probably not. Europe, despite fifty years of community policies, remains a union of different countries rather than a single state and this makes it difficult to create truly efficient multinational companies – see the marriage between Air France and KLM. The biggest obstacle, however, is the propensity for direct intervention by the States in the market. It is not only Italy that invests in Alitalia: the Dutch and French governments are shareholders of the Air France-KLM group while, in Switzerland, the canton of Zurich and the federal authorities held a stake in Swiss International Airlines, born from the ashes of Swissair. Unlike the United States, in Europe the temptation to keep the "flag company" alive, in the name of outdated market logic, is more than ever alive.