Plug and Play, the Eurowings Way: Lufthansa unveils a new scheme to promote consolidation

Lufthansa has a theory about why Europe’s airline industry remains so fragmented, even as the U.S. airline industry has become so consolidated. More interestingly, Lufthansa has a plan to help change that. There are four big impediments to European airline consolidation, the giant German airline says. For one, many European carriers (i.e. SAS, Finnair, TAP Portugal, LOT Polish, etc.) are partly or fully owned by governments, while others (i.e., Alitalia, Air Berlin, TAP Portugal, Virgin Atlantic, Czech Airlines, etc.) have ownership backing from foreign airlines. Some of these airlines might have been forced to merge with other European carriers had they not had alternative lifelines from taxpayers and foreigners. As it happens, another set of airlines like Condor, TUIfly and Air Europa have support from parent companies with wider tourism interests. So they too don’t feel the urge to merge that they might feel if they had to profit in their own right. A second reason for Europe’s fragmentation: the simple fact that leading low-cost carriers like Ryanair, easyJet and Wizz Air are doing so well on their own and thus have no interest in inorganic growth. Others like Norwegian are not doing as well but have organic growth plans that include hundreds of aircraft on order. Thirdly, consolidation is discouraged by the potential loss of overseas traffic rights—if Finnair became a British or German-controlled airline, for example, would it still be able to serve all the same countries throughout Asia from Helsinki? (Yes, the widely practiced group model, like the Lufthansa Group itself, addresses this, but it also prevents some of the synergies of a full U.S.-style merger.) And finally, Lufthansa cites U.S. bankruptcy laws as a key driver behind mergers like Delta and Northwest (which merged just after each carrier exited court protection) and US Airways-American, the latter in bankruptcy at the time of the deal. A U.S. airline in Chapter 11 bankruptcy protection, indeed, has extraordinary powers to cut costs, making it an especially attractive partner. Europe, alas, has no equivalent laws. This, of course, hasn’t stopped Lufthansa itself from buying Swiss and Austrian, for example, or Air France from merging with KLM. These deals in fact, happened more than a decade ago, before the big U.S. airline consolidation frenzy even started. More recently, the merged British Airways-Iberia entity ac…

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