The Emergence of Convergence: Europe’s airline sector approaching U.S.-like levels of profitability

Most of Europe’s publicly traded airlines have now reported their second-quarter results. A few like Aegean and SAS will report later this month. Others like Virgin Atlantic, Alitalia, TAP Air Portugal and LOT Polish—as non-public companies—generally keep their financial reports to themselves. Even without total transparency, however, there’s enough new information to delineate the key trends and forces shaping Europe’s airline sector mid-way through 2018. Here, in no particular order, are the most important:

• The sector maintained healthy profit margins in Q2: There’s lots of variation by airline, but collectively, the eight carriers featured on our page nine earnings scoreboard— which represent the vast majority of European capacity—managed a 10% springtime operating margin, only a point less than the 11% they jointly earned last year. Taking the Easter shift into account, it’s fair to say that unlike its U.S. counterpart, Europe’s airline industry showed no meaningful y/y profit deterioration.

• For Europe’s Big Three, the most powerful force in their favor was booming North Atlantic demand: Lufthansa, Air France/KLM and IAG had nothing but good things to say about their North American routes, enriched by bustling corporate demand for premium seats, the demise of Air Berlin, ongoing support from joint ventures, new longhaul planes, good economies on both sides of the ocean and robust tourism in both directions. Unit revenue trends were exceptionally strong even with the introduction of new basic economy fares and aggressive capacity growth by some—IAG’s Q2 North Atlantic ASKs were up 10% y/y.

• But the transatlantic boom didn’t benefit everyone: Nordic low-cost carriers watched the party from outside. Despite its many North American routes, Norwegian lost money again this spring, deepening a growing existential crisis. Transatlantic heavy Icelandair lost money too, agonizing about intense fare competition. Wow Air’s finances aren’t public, but viewing the competitive situation it faces in markets like Dallas-Fort Worth doesn’t inspire confidence—nor does the situation at Icelandair (which directly overlaps more than half of Wow Air’s routes and ASM capacity, according to Diio Mi schedule data). Add to this Wow’s decision to exit…

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