Predictions for the aviation industry are very positive. Various market outlooks, including Boeing’s, predicts that airline fleets, traffic and overall commercial aircraft market is set to only grow in the next 20 years. In total, Boeing predicts that airlines will require 44,040 new aircraft deliveries. Almost 9 thousand of those will be in Europe, a region where it seems that low-cost carriers and legacy airlines are engaged in a price war of attrition to win over passengers. The region is a special case, as Drew Magill, the managing marketing director for Europe at Boeing, spoke at AIR Convention and highlighted that in Europe “yields have decreased by 35% in the last 10 years, travel costs have gone down 35%, while at the same time airport pairs have increased by 30%”, thus there is more connectivity for a third of the price. While Asia-Pacific will drive future growth, Europe “has been leading” the industry for the past year”, added Magill.
Out of the 8,990 new aircraft deliveries in Europe, 7,260 of those will be narrow-bodies, according to the U.S. based manufacturer. And it’s not hard to see why – no-frills carriers like Ryanair, easyJet and Wizz Air are pressuring the “old” airlines like Air France, British Airways, KLM, Lufthansa (LHAB) (LHA) and many others. Yet the bickering between the two sides has created a problem on the continent.
Lowest price wins
One of the most relevant topics about Europe‘s aviation industry is the on-going price war between the Lufthansa (LHAB) (LHA) group and low-cost carriers, mainly Ryanair and easyJet. The feud, which sparked harsh comments from Lufthansa (LHAB) (LHA) ‘s CEO and a cheeky dig back from Ryanair, is entertaining to watch for now. Yet at the same time, as Lufthansa (LHAB) (LHA) tries to employ a damage-control strategy and reorganize its subsidiaries, including the low-cost Eurowings, the German airline group is bleeding market share in its own home market, Germany. Slowly, but surely, low-cost carriers are chipping away the difference in how many passengers depart from the country on mainline airlines‘ seats, according to Routesonline data. In 2014, the difference was 80.8 million departing seats. Just four years later, the difference is 47 million seats.
Elsewhere in Europe, the market is saturated with battles between legacy and low-cost carriers as well. In the United Kingdom, British Airways has to fend off several low-cost carriers, including long-haul competition from Norwegian and Virgin (VAH) . In 2017, out of the top five airlines by market share, British Airways was the second airline by passenger numbers behind easyJet. The low-cost carrier transferred almost twice as many passengers as BA. The following year, the flag carrier consolidated further, because both easyJet and Jet2 increased their traffic numbers by 10 and 3 million, respectively. And this is without including Ryanair – the Ireland-registered accounted for 19% of the market in the UK, according to its FY19 financial report.
Back in May, Air France already planned to axe 400+ jobs as it tries to reduce its losses and consolidates domestic market share to low-cost carriers, which have “gained ground through aggressive pricing policies”, as noted by the airline. In Spain, the top two airlines splitting the market are low-cost carriers, namely Ryanair and Vueling. And Western Europe is not the only region where mainline carriers are struggling. Heading East, Ukraine International Airlines is $100 million in the red, as its losses increase further due to fierce competition from both Ryanair and mainly, Wizz Air. The purple low-cost carrier announced seven additional routes in August 2019 from Ukraine, further pressuring the flag carrier of the country. Nordica, after hanging on by a thread, seems more than likely to exit its home base, Tallinn, and only operate flights without assuming commercial risk, as again, the competition finished off the Estonian airline – airBaltic and Wizz Air are mostly to “blame” for the consolidation of Nordica.
Legacy carriers try to combat low-cost alternatives with their own no-frills subsidiaries. IAG has established LEVEL, which just recently acquired an Austrian AOC. Lufthansa (LHAB) (LHA) has repositioned Eurowings to save its short-haul operations, while Air France-KLM group have Transavia as a low-cost answer operating in both France and the Netherlands.
At the same time, establishing, repositioning or acquiring companies to combat any of the LCCs requires to also take up a fair share of the market in a continent, where the market is already at its maximum capacity.
The main weapon of choice amongst the fight for customers is, of course, price. While this creates a false sense of demand, as passengers might buy tickets because they are cheap, rather than because they actually need to travel, it also saturates the market even more. Airlines attempt to combat low-cost carriers on the same routes, increasing frequencies with their low-cost alternatives. But the issue is that European air space, including space at airports, is approaching its limits. Manufacturers have a lot of work on their hands as well, as both Airbus (6,238) and Boeing (4,595) have huge backlogs for narrow-body aircraft, filling up delivery slots well into the next decade.
Low-cost carriers are not sitting on their laurels as well. For example, both Ryanair and Wizz Air have noted their ambitious growth plans. Ryanair plans to have 585 aircraft by 2024 and increase the total traffic of the group to 200 million passengers per year by 2024, while Wizz Air have indicated that they plan to triple its operations. The Hungary-registered company dubbed the plan W300 and aims to have 300 aircraft and carry 100 million passengers by the end of 2026. Magill added that”LCCs are growing as twice as fast than the network carriers; continue to expand their market share: from 31% in 2013, to 44% in 2018 on intra-European routes” and added that “competition is very intense”.
But airports have their limits. For example, London-Heathrow (LHR), which is one of the most congested airports, is trying to expand with a third runway – the decision announced in 2009 has still not moved any ground at the airport site. The expansion plans, which were met by huge backlash from the local community and subsequently have not made any progress, seem to be stuck. Heathrow‘s passenger traffic growth is slowing down, compared to other big European airports. In 4 years, the airport welcomed only 7 million more passengers – in 2014, Heathrow saw 73 million travelers at the airport, in 2018 that number was 80 million. While speaking at AIR Convention, József Váradi, the CEO of Wizz Air, has highlighted that “5-10 years ago, airports were begging for airlines” and he added that “now, the same airports are becoming full”, thus providing a challenging environment to operate in.
In contrast, the second busiest airport in Europe, Paris Charles De Gaulle Airport (CDG), has increased its traffic by 8.4 million in the same period, going from 63.8 million to 72.2 million passengers. Frankfurt International Airport (FRA) welcomed 10 million more passengers between 2014 and 2018, going from 59 million in 2014 to 69 in 2018. While various outside factors can limit growth, especially at London as the United Kingdom has faced Brexit uncertainty over the past few years, the fact that airlines are ready to splash as much cash as $75 million for landing slots at LHR proves that the airport is its limits capacity wise.
The outlook might look positive on the outside, but the massive growth brings its own fair share of issues, especially in Europe. Congestion, airlines trimming down their costs and sales campaigns to appease the customers, both from the manufacturers’ perspective and the airlines’ point of view, will definitely spice up the next 20 years in the continent, where apparently commercial aviation is yet to reach its peak.