Germany's Lufthansa Group looks set to expand, even as some rival airlines cut back or fall into bankruptcy. It has set its sights on becoming a leading global player. But air travel markets remain fiercely competitive.
The end of Air Berlin will continue to change the air transport market in Germany and Europe. There have already been three failures this year on the Continent. In addition to Air Berlin, which not long ago was the No. 2 airline in Germany, Alitalia filed for insolvency in May, and is currently being kept afloat by means of cash infusions from the Italian state. And in early October, the British holiday airline Monarch Airlines went under.
"There will be further consolidation in the coming years," Lufthansa CEO Carsten Spohr has said. That's been his view for a long time. For Lufthansa, Spohr believes, this trend presents an opportunity.
What the various insolvencies will mean for the German air travel market won't be known in detail until next summer. Several milestones must be passed before the mists clear. First, the EU competition authorities must approve Lufthansa's takeover of many of Air Berlin's routes. This involves the allocation of starting and landing rights at various airports. Further slots will be allocated at the regular conference of IATA, the International Air Travel Association; these will only enter into force with the upcoming summer schedule, after the end of March. There's always scope for additional changes before then, Spohr explained on Wednesday.
Germany crucial market
Not just Lufthansa but non-German airlines, too, are likely to be interested in taking over slots made available by the demise of Air Berlin. Germany is one of the most important economies and, thus, also among the most important air transport regions worldwide. But its geographic structure is very different from that of France or Britain, which each have a single dominant city, Paris and London.
Germany has several distinct regional economic hubs, all of which must be linked to European and global air transport networks, explained Eric Heymann, an analyst at Deutsche Bank Research. Now that Air Berlin is gone, the largest remaining German airlines, in addition to the Lufthansa Group, are Condor, TUIfly and Germania.
The German air travel market has already changed considerably in recent years. Several small airlines bit the dust, such as Augsburg Airways or Cirrus Airlines, which previously often flew regional routes under contract to Lufthansa.
"Scheduled regional flights with small aircraft in Europe, plying routes between the various major population centers, have almost disappeared," according to Cord Schellenberg, an analyst who tracks the air travel sector. Instead, discount airlines ply intra-European routes with larger aircraft, resulting in greater cost-efficiency.
"The budget airlines' business model works through low basic fares, upselling [of special seats or of food, drinks or trinkets on board aircraft], keeping the aircraft in the air more of the time rather than on the ground, and high efficiency," Schellenberg said.
The low-cost airlines thereby crowd small airlines out of business, as well as putting pressure on the big airlines through price competition. Yet in Germany, the budget airlines have a below-average market share compared to other European countries, according to Michael Gierse, an air travel sector analyst with Union Investment. In England, for example, budget airlines dominate, with a market share of 70 percent.
"German airlines long tried to shut the low-cost airlines out, and it's been more difficult for Ryanair or EasyJet to push into the German market," Gierse said.
Fending off Ryanair and EasyJet was one of the motivations behind Lufthansa's decision to buy shares in Eurowings, and ultimately take it over, just as it had already taken over Eurowings' subsidiary Germanwings in 2009.
Lufthansa has indirectly benefited from recent weakening in Ryanair's and Easyjet's positions. The former has had problems with its pilot recruitment, and the latter, which is based in Britain, has faced uncertainties about its access to European markets as Brexit unfolds.
Competition from other national carriers
In addition to the budget airlines, Lufthansa faces competition from two major European carrier groups. Air France and KLM merged in 2004. IAG was founded by a merger of British Airways and Iberia in 2011, and has since come to include Ireland's Aer Lingus and Spain's Vueling as well.
A third carrier group is spearheaded by Lufthansa itself, which in recent years has absorbed Austrian Airlines, SWISS, and Brussels Airlines.
Lufthansa Group may soon swallow Alitalia as well. Alitalia registered insolvency in May. Its weakness has permitted other airlines — Ryanair especially — to grab market share away from the Italian carrier.
Lufthansa Group chief Spohr appears to be interested in the group absorbing parts of a reorganized Alitalia, and has talked about possibly adding Rome as an additional hub. It would be Lufthansa's fifth hub, in addition to Frankfurt, Vienna, Cologne-Bonn, Brussels and Munich.
Parts of Alitalia's global network of long-distance flight routes would complement Lufthansa's existing routes well, and would be incorporated under the Lufthansa brand. Direct flights within Europe could be taken over by Lufthansa's Eurowings subsidiary. It has been rumored that Lufthansa's executive suite might be prepared to pay around a half-billion euros for the Italian carrier.
Even now, Europe's Big Five airline groups, i.e., Lufthansa, Air France, IAG, EasyJet und Ryanair, account for about two-thirds of the market. Yet that level of concentration remains considerably less severe than that of the air travel sector in the United States, where four airlines own 80 percent of the market.
"In America, this [high level of market concentration] has led to air ticket prices rising on average, and the airlines' profit margins have risen with prices," Union Investment analyst Michael Gierse said.
In Europe, prices have risen somewhat in the past few weeks, but "in the longer term, we expect prices to continue to move downward," Lufthansa chief Spohr said a few weeks ago. The reason is that competition from and between low-cost budget airlines remains fierce. In Europe as a whole, budget airlines have a market share of about 40 percent.
Overcapacity an issue
The recent wave of airline insolvencies suggests that the sector may be suffering from overcapacity. That appears to be the case outside of Europe too. Several relatively new Middle Eastern airlines, which had put more established carriers under so much pressure in recent years, are currently looking shaky. In part, that may be a consequence of lower oil prices, which have meant that subsidies and investments from Gulf petro-states are not flowing quite so generously at the moment.
Accordingly, the current weakness of the Gulf airlines may present a window of opportunity for Lufthansa Group to fortify its route network and grab market share, not just within Europe, but also internationally, especially with an eye toward booming Asia.
Lufthansa has a cooperation deal with Air China, but its European competitors are further along in their penetration of the Chinese air travel market. Air France–KLM, together with other heavyweights including Aeroflot, China Airlines, China Eastern, China Southern, Delta Airlines and AeroMexico, are partners in SkyTeam Airline Alliance, which has pulled together 20 airlines covering 1,064 destinations, many of them in China. If Lufthansa Group wants to establish itself as a leading global airline group, it will have to keep pushing ahead, forging new alliances and taking on new routes.