Last updated: 02:45 PM ET, Mon May 02 2016

Will Lufthansa Kick Off a European Airline Merger Era?

Airlines & Airports | Josh Lew | May 02, 2016

Will Lufthansa Kick Off a European Airline Merger Era?

Photo via Wikimedia Commons

Lufthansa is currently involved in merger rumors with Brussels Airlines. The German carrier has until August to exercise an option to buy the Belgian airline. This would be a major merger for the industry in Europe. 

During a recent shareholders' meeting in Hamburg, Lufthansa CEO Carsten Spohr said that his carrier’s takeover bid should not be an isolated move. He claimed that further consolidation is necessary if European airlines really want to compete with international carriers: “Consolidation is a part of what needs to happen in Europe in order to make the sector more competitive when compared to the United States and Asia. As Europe’s largest airline, we want to take part in consolidation, not just be a bystander.” 

Major mergers have missed Europe

Spohr also went out of his way to point out how the trend of consolidation that took the Americas and Asia by storm almost completely missed Europe. According to his math, 80 percent of the U.S. market is controlled by the five largest carriers in the country. In Europe, the five largest airlines only control about 40 percent of the market. 

READ MORE: Lufthansa Cancels Almost 900 Flights As Strike Looms

Part of the reason that U.S. carriers have been so profitable over the past year is that consolidation has put a damper on competition, and this has led to larger profits. Though many European airlines have enjoyed success, their revenue numbers are nowhere near those of their American peers. According to the IATA, more than half of the industry’s overall profits for 2015 came from one continent: North America.   

Competing interests

There are certainly some major players on the European scene. Lufthansa’s purchase of Brussels Air would be one of the biggest moves on the continent since the Air France/KLM merger. The German carrier has also expressed interest in struggling Scandinavian airline SAS either in addition to Brussels or instead of it. 

The main roadblock for major mergers in the EU is that airlines often have competing interests that have a political component to them. This is not as much of a problem in the United States, and even in Asia, airlines have shown a willingness to put politics aside in the name of business. 

That has not happened in Europe, though some of the major players like Air France, KLM, the airlines owned by IAG and, now, Lufthansa are moving towards consolidation. Low cost carriers remain very powerful on the continent. Rather than trying to merger with one of these already-established airlines, carriers like Lufthansa have created their own low cost wings. These have, for the most part, not been able to compete with Ryan, easyJet, Wizz and Norwegian. 

Challenges from the outside

Furthermore, Gulf airlines and East Asian carriers are challenging European airlines on long haul markets. Thanks to aggressive shareholding strategies and code-sharing agreements, these outsider airlines are competing with Europe’s biggest airlines right in their own backyards as well.

READ MORE: Which US Airlines Might Merge Next?

For many smaller, regional airlines and for the many leisure carriers that ply their trade on the continent, mergers are becoming the only way to survive in a crowded marketplace dominated by larger LCCs. At the recent Routes Europe conference in Poland, a number of industry stakeholders urged smaller airlines to consolidate so that they could have enough capacity to compete with low cost carriers as they move in on more and more regional routes that were previously not competitive. 

So the merger trend could come from the bottom up in Europe, with leisure airlines and regional carriers joining forces in the name of survival and perhaps eventually being seen as possible targets for purchase by larger airlines. 

If the Gulf carriers continue to expand, some of the continent’s larger players might be forced into mergers. But for now, airlines still have time to overcome their differences and combine to create a more competitive environment.  

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