Europe's Airlines Join Forces to Survive

By , Staff writer of The Christian Science Monitor

THE storm clouds looming ahead for European airlines look strangely familiar. Deregulation. Fierce competition. Consolidation. The American airline industry climate of the 1980s has suddenly found a new home in Europe.

The likely result is a dramatic consolidation of the continent's industry. Europe, home to more than two dozen carriers, will find itself with no more than five major players early in the next century, analysts say.

"Europe does not need 20 or 30 airlines," says Albert DeLauro, director of transportation consulting services with San Francisco-based Towers Perrin. He foresees two or three European airlines surviving as major global players.

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David Pizzimenti, airline analyst with Nomura Research Institute America, sees four, perhaps five major European airlines: among them British Airways, Air France, and Lufthansa. Most of the smaller carriers will be merged or taken over. "If they want to be survivors, they have to team together," he says.

Political and economic considerations are driving this move. Strapped for cash, European governments are now more inclined to liberalize competition and eliminate subsidies to loss-making airlines.

"Do you put the money in national education or into the airline?" Mr. DeLauro asks. Increasingly, governments are choosing education. The European Community has agreed to fully liberalize the industry by 1997.

The consolidation will probably be slower and less dramatic than it was in the United States, says Kees Veenstra, general manager of aero-political affairs for the Association of European Airlines in Brussels. But "it is quite clear that we are moving to a more competitive regime."

Elements of this consolidation are already under way.

France, for example, used to have three airlines: UTA, Air Inter, and Air France. Now, Groupe Air France owns all three. Faced with overcapacity and recession throughout most of Europe, the airline has consolidated routes, eliminated 16 percent of its administrative personnel, and cut 10 percent of its operations force - achieving a 13-percent cost-reduction in the past three years.

It is still not enough. Groupe Air France (including its non-airline companies) lost 32 billion francs ($530 million) last year. "Because we can't do anything on the revenue side, we have to continue to act on the costs," says company spokeswoman Marie-Clotilde Debieuvre.

The airline is also pursuing alliances around the world - its most recent with the American carrier Continental Airlines. Last year, it took a 37.5-percent stake of Belgium's airline, Sabena, and a 38.2-percent stake in the Czech airline, CSA.

Other European airlines are following suit. British Airways has an important stake in USAir and Quantas. KLM Royal Dutch Airlines has linked up with Northwest Airlines. And the four mid-sized European airlines - SAS, Austrian Airlines, Swissair, and KLM - aim to fuse operations.

Negotiations have bogged down, however. Austrian Airlines, which would have a 10-percent share of the new company, worries it will lose its national identity. The carrier reportedly has considered linking up with Lufthansa instead. The Swiss government in May also requested Swissair investigate alternatives.

"Having an airline in one's territory is of very great importance," Mr. Veenstra says. Air transport is a strategic link and a national symbol. "No government in the world, including in the US, would be willing to let go of its own carriers."

Such strong strategic and nationalist arguments will slow the move toward fewer and larger European airlines. But analysts, such as DeLauro, believe the trend will continue. European airlines are generally unprofitable, partly because of the current recession, partly because their operating costs are significantly higher than their US competitors.

Analysts point out that many European carriers operating costs are as much as 33 percent higher than their US or Asian competitors. A notable exception is British Airways, which revamped its operations using a cheaper labor force after privatization. Air France chairman Bernard Attali last fall estimated his company would save 4.2 billion francs ($696 million) a year in labor costs if it operated in Britain instead of France.

The Europeans have another disadvantage. They do not have the huge domestic base of their American competitors and, thus, are much more reliant on international traffic. Last year, for example, US scheduled airlines carried 473 million people, of which only 43 million traveled internationally. Their counterparts in Europe transported only a third as many total passengers, but their international component was 34 million.

"The scope of opportunities that airlines have in the United States are for all intents and purposes three times as big as in Europe," Veenstra says.

These factors are forcing Europe's airlines to buckle their seat belts. The turbulence is ahead.

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