During the Covid crisis, we published an analysis of the airline industry’s future. At that time, we predicted a market consolidation due to the disappearance and takeover of “small” airlines. This consolidation is underway, and 2023 will be the year it will materialize.
Statistics on the airline market in 2022-2023
- 791m: Lufthansa profits in 2022
- 728m: Air France-KLM profits in 2022
- 431m: IAG profits in 2022
- 142m: EasyJet profits in 2022 after a loss of €193m in 2021
- 3-1.4 billion: Ryanair’s estimated profits for the fiscal year 2022-2023
- 500m: the amount of the Air Europa takeover by IAG
- 30%: the market share in Europe of the 6 largest groups (Ryanair, Turkish Airlines, Lufthansa, IAG, Air France-KLM, EasyJet)
- 66%: the market share in the United States of the 4 largest groups (United, Delta, American Airlines, Southwest)
EasyJet: the first attempt at a takeover … aborted
EasyJet was almost the first major victim of this consolidation during the Covid crisis. As early as 2021, it was the subject of a takeover attempt by Wizz air. However, it rejected the takeover.
EasyJet remains in a delicate position. Its losses of €192m in 2021 made it a prime target for other groups with better cash flow. Its situation improved in 2022 even if it remains fragile (profits of €142m in 2022).
Air Europa’s case is closed, and TAP is the next target
Air Europa was the third-largest Spanish airline. IAG bought it for 500 million Euros after a first attempt for 1 billion in 2019. Covid has passed through, which has weakened the position of “small” companies.
From now on, TAP, the Portuguese company, is the object of interest. Air France – KLM and Lufthansa are among the possible buyers. TAP is a prime target for several reasons:
- the company was nationalized in 2020 during the Covid, and the Portuguese state must put it back on the market
- TAP has a leading position in Portugal
- TAP is a gateway to Brazil (see below the paragraph on HUB erization)
We are betting on a takeover of TAP in 2023
Another important file is ITA Airways. This company, born from the ashes of Alitalia, is of interest to Lufthansa. Rumors indicate that Lufthansa would buy 40% of it before the summer after signing a letter of intent (LOI) in January 2023.
The benefits of consolidating the airline market
Consolidation brings 3 main benefits:
- economies of scale
- increased bargaining power
- new routes and a stronger role for hubs
Economies of scale
Low-cost airlines have built their business model on economies of scale. Today, they are an indispensable condition for success. These economies of scale are reflected in purchasing (see next paragraph) but not only. The digitization of processes is costly, and it is, therefore, advisable to have the largest possible customer base to pay for it. In addition, consolidation also makes it possible to propose more attractive loyalty programs because more companies are involved.
Negotiating power
In a world where supply and demand are becoming digitalized, negotiating power is an essential factor in improving margins. This power allows us to negotiate better commissions with intermediation platforms (Expedia, Opodo, and so on…) through which consumers make their purchases today.
This negotiating power also materializes in the orders to manufacturers. Mega orders” are now the norm, and records are broken yearly. In February 2023, for example, Air India ordered 540 aircraft at once: 250 Airbus and 290 Boeing! Never before seen.
New routes and “Hub erization
Good acquisitions also make proposing new routes and destinations to customers easier. This is the reason why TAP is coveted. Indeed, the Portuguese company is a gateway to Brazil and its millions of tourists. The acquisition of TAP by one of the major European carriers would strengthen one of the major European hubs: Paris (Air France-KLM), Frankfurt (Lufthansa), or London (IAG). This strengthened role of the hubs was one of the predictions we made in our analysis of the sector during the Covid period.
Europe: THE market where consolidation still needs to be achieved
In the end, Europe is still very fragmented, with the 6 largest groups sharing only 30% of the market. These 6 groups are:
- Ryanair
- Turkish Airlines
- Lufthansa
- IAG
- Air France-KLM
- EasyJet
Many regional and national airlines continue to operate and capture a significant market share. However, many of these companies are in decline:
- Tarom (Romania)
- Czech Airlines (Czech Republic)
- AirBaltic
- Corsair (riddled with debt)
and many others are surviving by concentrating on a few specific national destinations (LOT, Finnair, …).
Corsair is a prime target for Air France – KLM. This airline offers destinations to the French Overseas Departments and Territories and is very indebted. Finnair has recovered over the last two quarters of 2022 but has lost 163.9 million euros over the fiscal year. We, therefore, confirm our forecasts for takeovers in the next 24 months.
The future of air transport: 12 companies … at least
Carsten Spohr, back in 2019, was already looking at the future of air transport from the consolidation perspective. He saw 12 airline groups sharing the market. Our analyses predict a future with 15 airline groups.
- 4 in Europe (Ryanair, Lufthansa, IAG, Air France – KLM)
- 4 in the US (Delta, United, American Airlines, Southwest)
- 4 in Asia (Singapore Airlines, Air China, China Southern Airlines, China Eastern Airlines)
- 3 in the Gulf States (Emirates, Qatar Airways, Etihad)
The balance between low-cost and traditional airlines can no longer be questioned. Although the need is a priori the same (to travel by plane), the positioning is so different that they can only co-exist. Even if the low-cost/traditional airline rivalry is presented from the point of view of competition, a long-term analysis must consider the complementarity of these models. The destinations are different, the needs are sometimes different, and the customers are often opposed. In Europe and the US, the positions of Ryanair and Southwest Airlines have become unshakeable.
Posted in Strategy.
