Big shake out looms in Europe’s airline sector
Roughly 5-10 years ago, the US aviation industry was experiencing a huge shakeout due to rising fuel prices, waning economy, and a downturn in air traffic following the post 9/11 era. War in the Middle East, epidemics such as SARS, H1N1, and Avian flue, and natural disasters plagued carriers, forcing them into massive reductions in labor, capacity downsizing, Chapter 11 bankruptcy filings, and the onset of using ancillary revenue fees (such as checked luggages charges) to help offset the damages.
The first to feel the shocks were the legacy carriers. Four of the big six at the time (Delta, Northwest, US Airways and United) all filed for Chapter 11 restructuring. Several long-standing “niche” carriers ceased operations entirely, including National, Aloha Airlines and ATA Airlines. Carriers such as US Airways and Frontier Airlines clung on for dear life, ultimately choosing to consolidate with America West Airlines and Midwest Airlines, respectively, in order to stay in business. We saw some startup carriers come and go (such as Skybus, Jet America and the all-premium class carriers Eos, MaxJet and SilverJet), all of whom were driven into the ground.
Ultimately, the US-AWA merger spawned a pattern of consolidation for Delta and Northwest, United and Continental, and AirTran and Southwest in order to leverage their long-term viability. Consolidation became a necessary survival tactic. But while things may be more at bay in the States (with the DL-NW merger complete, UA-CO and SW-AT relatively complete, and AMR in Ch 11 bankruptcy restructuring), what is going on across the pond? Same effects, albeit slightly delayed?
Today, the Wall Street Journal reported on how a big shake-out is on the way for Europe’s airline sector. Last week, I wrote about how struggling legacy carriers, such as Air France-KLM, are racing against time to move their way out of financial insolvency. On Friday, loss-making Spanish carrier Spanair halted operations, citing financial woes and the inability of the Spanish government to inject the necessary capital that the company needs to survive.
As I type these sentences, Malev Hungarian airlines is currently battling to survive by the hour. Yesterday, the carrier filed for bankruptcy protection, and today Reuters reported that the carrier does not have the proper financing to continue operating. The company underwent restructuring in 2010, but the European Commission forced the carrier to repay millions of dollars worth of state aid, received between 2007 and 2010, which has caused the Hungarian government to put Malev under protection from creditors. The carrier is aggressively searching for private investors, pointing to positive indications such as uptrends in passenger booking numbers, improved in-flight experience, and it’s membership in the OneWorld alliance as a key gateway airline to Eastern Europe. More than anything, Malev just simply wants to establish that keeping the company alive is an important strategic consideration for the Hungarian nation.
When I sit back and try to assess all of these considerations, the first thing that comes to mind is, “what a cyclical nightmare for Europe!” For starters, these airlines are recognized on a global scale. Air France-KLM is a SkyTeam member. SpanAir is in Star Alliance. Malev is part of OneWorld. They are key links to establishing cross-border interline agreements and revenue advantages for member carriers. Intense competition from low-cost carriers such as easyJet PLC, Ryanair Holdings and Norwegian Air Shuttle are severely crippling their performance on the intra-Europe sector. But none of the competitive forces are part of any alliances, which is not good news for the rest of the world.
It’s a difficult situation for Europe, indeed. The Journal reports that other national legacy carriers, such as LOT Polish Airlines, Scandinavian Airlines, and CSA Czech Airlines also face a difficult year ahead of them.
It truly is a dog-eat-dog world out there. The tight credit markets in Europe also certainly don’t help matters.
Read more about it here.
Bloomberg: Delta weighs bid for US Airways group in review of M&A options
In the latest round of musical chairs with discussions of potential merger tie-ups between three of the remaining US carriers, namely Delta Air Lines, Inc. US Airways Group, Inc, and bankrupt AMR Corporation, Bloomberg reported yesterday that Delta is studying a bid for US Airways group. This evaluation remains independent of previous discussions that Delta was assessing potential bids for American, and US Airways was also looking at merger potential with American.
CEO of US Airways Group Doug Parker spoke his view on potential merger possibilities during the January 25 earnings conference call, saying that US Airways is, “always interested in studying potential value-enhancing opportunities.” Both US Airways an Delta reported profits last week for the last quarter of 2011, topping analysts’ projections.