AEA SUMMIT: European airlines' challenges and opportunities

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Analyst and AEA Aviation Leadership Summit speaker Chris Tarry examines key issues and obstacles confronting airline managers seeking to improve financial performance

Generalisations are always dangerous, and in Europe the airlines have a wide range of performances and behaviours, while facing a wide range of key and pressing issues – some common, others unique.

The reality for any airline manager is that it is not what is going on at an industry level that is important – although this might be of interest – it is what is happening at a company level at their own airline as well as at competitors that matters. This is where the challenges and opportunities lie.

The European economic background remains mixed at best, and although any improvement in a local economy will be positive, the boost this may give to traffic growth in the medium and long term is likely to be minimal. Furthermore, the output of a number of economies in Europe has yet to recover to pre-downturn levels.

While more dynamic economies will offer growth, the issue is the impact that access to these has ­already had or may have on the business overall.

Competitive pressures will increase and the beneficiaries will be, as ever, the actual or intending travellers who in value terms get more for a lower price. In the short-haul segment the so-called “low-cost” airlines will continue to focus on the higher-value ­segments of the market, although some among them will face increasing challenges.

The Gulf carriers will continue to increase their presence on a number of routes, which will have an impact on direct traffic and connecting flows.

There is no single or “one size fits all” way for an airline – or for the European industry as a whole – to improve its financial performance. There is no shortage of restructuring plans in evidence across Europe’s airlines. However, one common element between them is a recognition that change is neither instant nor without cost.

That change also tends to be reactive, and in most cases these programmes appear to be more about catching up with rather than getting ahead of the curve.

While costs are of course important, profitable revenue is even more so – and this is a major challenge against a market outlook where the economic forecast is dull at best and unstable at worst.

Although some merger and acquisition activity has delivered real strategic benefit, the jury is still out with respect to the actual benefits of “grand design” cross-border mergers, which should deliver more revenue for markedly lower cost – in other words, “more for less”.

While consolidation is a feature of mature industries, it can also occur through market exit where “sustaining the unsustainable” is no longer an option. But here politics and social considerations still appear to overwhelm business economics. Innovation is seen as a response to a mature market – which is what Europe now is, in terms of air transport. Innovation as a term is of course open to wide interpretation and covers all aspects of business.

To varying degrees, all of Europe’s airlines need to structurally change their businesses if they are to fundamentally and sustainably improve their financial performance; the ability they have to do so clearly varies. However, without change the only likely outcome for many of Europe’s airlines is absolute as well as relative decline, with a range of associated consequences.