Flight of the Living Dead: Zombie airlines are haunting Europe’s excessively fragmented airline sector

Flight of the Living Dead: Zombie airlines are haunting Europe’s excessively fragmented airline sectorForget the strike-prone labor unions, the government austerity, the economic doldrums, the high taxation, the overregulation, the expensive airports, the opposition to airport expansion, the wasteful Eurocontrol regime, the heavy seasonal swings, the night curfews, the capacity growth and the Gulf carrier incursions. Yes, all of these hurt. But ask European airline executives what they find most frustrating, and they’re likely to utter the “F” word: fragmentation.

To be sure, not all of Europe’s airlines are struggling. Ryanair and easyJet are doing fine. Aegean had a surprisingly strong 2013. But these are the exceptions. Even the giant IAG—trending up thanks to strong London demand at British Airways, massive cost cutting at Iberia and growth-fueled profits at Vueling—is earning profit margins half those of its U.S. partner American. Its margins, in fact, are more or less in line with those at Lufthansa, which, in an investor update last week, documented a litany of woes. Air France/KLM is in even worse shape. And on the endless list of independent mini-airlines flying throughout the continent, most are living hand to mouth.

The situation stands in stark contrast to what’s happening in the U.S., where rising fortunes stem, more than anything else, from consolidation. With fewer airlines, other profit-boosting developments, including capacity restraint and aggressive ancillary charging, can more easily take root. Importantly, it’s not on longhaul international routes where U.S. airlines are outperforming their European peers. It’s on shorthaul routes, contested by 11 major carriers in the U.S. but by more than 50 in Europe.

Things, of course, weren’t always this way. Frustration among U.S. carriers ran deep during the mid-2000s, when many European airlines were thriving thanks partly to greater exposure to fast-growth emerging markets, including ones within narrowbody range like Egypt, whose economy, fueled by countless tourists flying in on European airlines, grew 7% annually in the mid-2000s. Currency and hedge protection against the fuel spike helped too. U.S. carriers knew the answer: fewer airlines. But the requisite mergers and liquidations weren’t happening. Instead, zombie airlines stayed alive thanks to lenient bankruptcy laws, federal loan programs, exuberant private equity investors and status quo enablers like General Electric and American Express, who were unwilling to see their big airline partners disappear. Even the first big merger of the era—America West’s 2005 purchase of US Airways—hardly…

Click Here or the button below to sign up for a Free Trial.

This issue is not currently online. To inquire about purchasing a copy, please email subscription@skift.com.