Europe in the Age of Covid
Q2 was frightful. What’s next for the continent’s airline sector?
Most of Europe’s major airlines have now reported their Q2 financial results, including the Big Three carriers Lufthansa, Air France/KLM, and IAG. The results, needless to say, were ugly. Carriers with big cargo operations like Lufthansa and KLM saw losses mitigated somewhat. But with passenger operations largely dormant until late in the quarter, bottom-line losses reached well into the billions of dollars. The Big Three, together with Ryanair, Wizz Air, Finnair, and Icelandair, collectively amassed $5.7b in operating losses. A few others that haven’t yet reported, like SAS, Norwegian, and Aegean, will surely add to that loss total. The figure would look more gruesome still with results from non-reporting airlines like easyJet, Virgin Atlantic, Alitalia, TAP Air Portugal, and LOT Polish.
At the very least, Europe’s shorthaul airline markets are starting to show signs of life this summer. Unlike their U.S. counterparts, which were forced to maintain flying throughout the pandemic, Europe’s airlines kept most of their passenger planes on the ground early on in the crisis. Only in mid-June was there a meaningful restoration. Countries began opening their borders to other Europeans, leading to some green shoots in shorthaul tourism to places like Greece. Last month, for example, traffic at Athens airport was down 70% y/y, an improvement from down 88% in June, and down 96% in May. Most other European airports haven’t yet published traffic data for July. But airlines say they’re pleased with shorthaul leisure trends.
But the mini-revival is choppy and uncertain. IAG highlighted strength in Spanish markets until the U.K. imposed a quarantine on travelers returning from Spain. Other countries too have seen Covid cases rise in recent weeks, leading to sudden and disruptive changes in travel restrictions. This raises the risk of a freeze in demand momentum, as U.S. airlines experienced in June. Since the start of the crisis, Covid-19 has killed more Europeans than it has Americans—close to 190k, or more than 200k if you include Russia. But Europe has made greater progress in controlling the outbreak over time. Even so, the economic damage has been no less drastic. Even in Sweden, which kept its economy more open than others, air traffic in June was down 95% y/y, according to ACI-Europe.
For cash-rich LCCs with ironclad balance sheets—Ryanair, Wizz Air, and easyJet—shorthaul is everything. As such, the green shoots of summer are encouraging. For the Big Three and others like Virgin Atlantic and TAP Air Portugal, shorthaul simply isn’t that meaningful. Unlike the U.S. Big Three, which generated an outsized portion of their profits from domestic markets in recent years, Europe’s Big Three rely far more on intercontinental markets. Flying within the E.U. has long been a struggle, with even corporate travelers routinely flying LCCs on what are typically short journeys of an hour or two. There’s no intra-E.U. equivalent of the giant, premium-heavy transcon domestic markets that are so important to Delta, American, and United.
Sadly, intercontinental routes remain largely mothballed. Some are operating with cargo top of mind. There is some number of people with dual citizenship or emergency reasons travelling across borders. Hubs like Amsterdam and Frankfurt are serving similar roles as America’s mid-continent hubs like Dallas DFW and Denver, capturing connecting demand to the many itineraries currently without nonstops. Someone travelling from the U.S. to India, for example, would likely use a European hub right now. But these are sideshows. The real bread-and-butter markets like U.K.-U.S. business and leisure travel remain mostly frozen due to traveler hesitancy and quarantine rules.
Europe’s longhaul players are hoping transatlantic markets revive before year end. Not that they expect to see any significant business demand by then. But with new cost realities and downsized operations, even a modest leisure revival will help a lot. It’s why Lufthansa is still so keen on finally finding the right business model for low-cost longhaul leisure flying. Back within Europe, finding the optimal way to serve shorthaul leisure markets will be key for legacy giants. Air France, for its part, will greatly expand its low-cost Transavia operation with the blessing of its pilots. Vueling will be a useful tool of adapting for IAG.
Unlike America’s uniform federal airline support, industry support throughout Europe has varied greatly by country. But counterintuitively, those receiving the biggest bailouts might also be the most disadvantaged. Bailouts, make no mistake, haven’t come cost-free. Lufthansa’s situation (see earnings review above) makes that clear. Carriers denied big bailouts, like British Airways, Ryanair, Wizz Air, and easyJet, didn’t have to surrender any ownership to taxpayers. They won’t have to cut parts of their shorthaul network, as Paris required of Air France. All of Europe’s airlines though, have weaker balance sheets now than they did pre-crisis.
One form of government assistance—temporarily suspending airport slot rules—is a barrier to LCCs (Ryanair and Wizz most importantly) seizing advantage of opportunities to enter capacity-constrained airports. That said, airports will be more eager than ever to attract new air service by dangling lower fees and charges. Ryanair and Wizz will be ready—they still intend to take lots of new planes. On the other hand, some airports like Frankfurt, to Lufthansa’s chagrin, are actually increasing charges.
Labor battles will be another primary feature of the European airline landscape this fall. Already, carriers are wrangling with unions over desired concessions. The crisis has not, importantly, led to any significant consolidation through collapse. Flybe’s early demise was hardly an omen of things to come. Instead, the most vulnerable of Europe’s airlines received generous government aid, sometimes in conjunction with a bankruptcy-like restructuring of the sort that Norwegian undertook. SAS and Icelandair, knowing they’ll have to compete with a nimbler Norwegian, are attempting something similar. Both are getting state support, on the condition they reduce their existing obligations to bondholders, aircraft lessors, and other creditors. They’re also required to implement a lower cost structure, hence the need for labor concessions.
Consolidation through mergers might arise. Might one of the continent’s LCC champions find a slimmed-down Norwegian a good fit? IAG still wants to buy Air Europa and might be able to do so at a much lower price now. There might be smaller tie-ups involving players like Germany’s Condor.
The key fact remains: Europe remains a much more fragmented market than the U.S. The pandemic hasn’t changed that.