[Scope Ratings] European airlines: enduring market fragmentation complicates pandemic recovery process

Signs of possible further consolidation in Europe’s airline sector are a reminder of how difficult the recovery from the Covid-19 shock will be for the still fragmented industry, particularly compared with the US, says Scope Ratings.

The unsolicited takeover approach by Hungary-based Wizz Air Ltd. for easyJet PLC earlier this month coincides with new fundraising by easyJet itself, while Deutsche Lufthansa AG (BBB-/Negative) is also planning a capital increase. The three carriers are among the six dominant airlines in Europe alongside Air France-KLM SA, International Airlines Group PLC and Ryanair PLC. Pre-crisis, the five western Europe-based carriers controlled a little more than 50% of the European passenger-travel market whereas the top five US airlines shared around 70% of their domestic market.

“Easyjet rebuffed Wizz’s approach, but we suspect that further consolidation will take place, perhaps just not as fast as it should, given the long-term pressure on profitability exacerbated by the pandemic,” says Azza Chammem, analyst at Scope.

“The European industry remains vulnerable partly because of the overcapacity that makes it nearly impossible for most carriers to build up the resilience they need to cope with the sector’s cyclicality and vulnerability to external shocks unless they are at the bottom of the cost curve like Ryanair and Wizz Air,” says Sebastian Zank, deputy head of corporate ratings at Scope.

Network carriers such as Air France-KLM, IAG and Lufthansa have over recent years led consolidation in the sector, but the pandemic has constrained their capacity to do much more. Ryanair and Wizz Air are the most likely European airlines to lead future consolidation.

“Wizz Air has boosted its status as Europe’s fastest-growing airline and looks well established, seeking opportunistic growth during the pandemic as it benefits from its strong financial position, in contrast with the cutbacks at the likes of easyJet and Lufthansa,” says Chammem.

Competition remains fierce, despite the collapse of small and medium-sized European airlines over the past 20 years. Many smaller carriers survive while new ones continue to find backers, due to low interest rates and plentiful supply of investment capital and cheap aircraft. Thirteen new carriers are set to take to the skies in Europe this year, according to market intelligence firm CAPA. Norwegian Air is expanding its routes again after being put into administration during the height of the pandemic. Alitalia, the continuously unprofitable Italian flag carrier, is about to be reborn under a new holding company called Italia Transporto Aereo.

“The European airlines market is more fragmented and less profitable than the US market where Delta, United and American have positioned themselves as the top three airlines with few competitors,” says Chammem. “The outlook in Europe is more uncertain: weaker airlines will not survive the enduring Covid-19 shock amid the tough competition in the long term.”