Margin squeeze could prompt airline consolidation
An increasingly competitive European airline market could soon bring consolidation and possibly European low-cost carriers providing local connecting services or "feeder" flights for full-service long-haul airlines, the CEOs of easyJet and IAG said yesterday.
Low fuel prices have led to a big growth in capacity on European routes, putting market expansion at a 10-year high on forecasts that airlines will add new capacity of 8pc over the next six months.
But inevitably increased competition is causing fares to drop, good news for consumers but bad news for the profit margins of airlines.
Willie Walsh, the chief executive of British Airways-owner IAG, said IAG was not currently actively considering any acquisition deals.
"I think there are airlines out there that would like to be consolidated into a larger group, I get calls from a lot of them," said Walsh, who has been Europe's most active acquirer of airlines in the past five years, combining BA with Iberia to form IAG, which has since taken over Spanish budget airline Vueling and Irish airline Aer Lingus.
However, Carolyn McCall, the chief executive of easyJet said she expected more consolidation over the next 12 to 18 months, with weaker airlines suffering in the tougher trading conditions, as the previous boost to margins from lower fuel prices is competed away.
Deutsche Bank on Wednesday downgraded its investment recommendations for Ryanair, Lufthansa, Air France-KLM and IAG, with the analysts saying there was too much capacity in the industry and prices would fall further this winter.
Price drops could stimulate further change in the industry in the longer term, McCall said.
Ryanair and easyJet both have an eye on providing feeder flights for long-haul carriers, but so far no deal has been struck. (Reuters)