The euphoria of last year's consolidation of the European charter market with the Thomas Cook/MyTravel, TUI/First Choice and Air Berlin/LTU link-ups has been slowly evaporating. They were to be marriages made in heaven, but falling demand allied to high fuel prices, the threat of economic recession and the strength of the Euro have dampened expectations and derailed, at least for now, further consolidation efforts. Meanwhile, there have been some recent casualties among leisure carriers but also some success stories, painting a mixed picture of the sector's future.
Thomas Cook announced in July that plans to sell its German charter airline Condor to local rival Air Berlin had been abandoned because of soaring fuel costs and concerns over approval by German competition authorities. Immediately following the announcement, Condor joined the complex discussions over a proposed merger of TUI carriers Hapag-Lloyd and Hapag-Lloyd Express, with Lufthansa's regional subsidiary Eurowings and budget arm Germanwings.
However, according to Christoph Müller, aviation director of TUI Travel and this year's president of the International Air Carrier Association, it is too early to predict the outcome due to the difficulty in forecasting how long it will take for antitrust issues to be resolved. "What I can say with some certainty is that consolidation will happen in Germany. What we don't know is in which constellation. But, personally, I would say the sooner the better," says Müller.
Germany's third force, Air Berlin, is undergoing a strategic review of its operations and has already announced a reduction in its winter programme and the withdrawal of at least 14 older short- to medium-haul and some long-haul aircraft. The axe is expected to fall mainly on its LTU charter operation, but full details were not due to be announced until the end of September.
Two of Europe's largest charter airlines went out of business in September, causing shockwaves throughout the travel industry. The first to fold was Futura International Airways, Spain's largest charter airline, which succumbed to financial pressures and on 8 September submitted a request for insolvency proceedings after the necessary support from different parties failed to materialise. It blamed the difficulties being experienced by the charter sector, but above all "the excessive and speculative increase in fuel in the last few months". Its Irish subsidiary, Futura Gael, had ceased flying two days before.
Less than a week later, the UK's third largest tour operator XL Leisure and its airline arm XL Airways grounded its fleet and called in the administrators. The group had already cut capacity and had been in discussions on a refinancing package for several weeks. XL said: "These companies entered into administration having suffered as a result of volatile fuel prices, the economic downturn, and were unable to obtain further funding." The French and German divisions of the XL group, however, "continue to trade as normal".
But against this uncertain background, Thomas Cook had issued an upbeat trading statement in August, saying it saw no evidence of consumers cutting back on holidays or trading down, with current trading particularly strong in summer 2008 and bookings for winter 2008/09 and summer 2009 ahead of last year. "When it comes to the main holiday, it is a 'must have' item for consumers," says Thomas Cook chief executive Manny Fontenla-Novoa. "In our experience, people will cut back on all sorts of other things before they cut back on their holiday." He admits, however, that the strong Euro is affecting booking patterns, with non-Euro destinations such as Turkey and Egypt now proving far more popular than Spain and Portugal.
In the financial statement for the nine months to the end of June, TUI Travel echoed Thomas Cook's experience, confirming that there has been no deterioration in consumer demand. "We are positively surprised that people are not questioning their annual vacation," says Müller. "What we see is that the family holiday remains sacrosanct, but people respect their budget ceiling very well, cutting back on shorter vacations, long weekends, city breaks, going medium- rather than long-haul and maybe choosing a lower grade hotel."
This assessment is confirmed by Sylviane Lust, director general of IACA, who adds: "At present, we are finding that leisure airlines are continuing to do relatively well despite the current economic climate, and that they have reacted to these circumstances quickly in order to maintain demand for their products and package holidays.
"Given that leisure travel has always been a price sensitive market, carriers are obviously aware that they have to remain flexible to adapt to changes in demand and external factors affecting their market. Leisure carriers have already implemented early and careful capacity management policies and we have seen carriers reducing overall capacity to ensure optimum seat load factor."
TUI Travel is one company that has initiated a wide-ranging capacity management programme. It cancelled large numbers of the Thomsonfly low-fare routes, bringing total capacity down by 10-12%. The vast majority of routes withdrawn were short flights to destinations with no tourist traffic and were a prelude to getting out of this market altogether.
"The low-cost feed-only business is not our core business," says Müller. With further plans in place to cut UK capacity for the next winter by 21% and 15% in summer 2009 through a reduction in third-party flying and six fewer aircraft, as well as plans to cut capacity by 6% in Germany for next summer, TUI is clearly expecting a slowdown in its premier source markets. TUI has also taken much of its third-party flying in-house.
"The largest market where we buy third-party capacity is Germany, because we do not have our own long-haul operation, so we buy our entire long-haul seat capacity from LTU, with which we have a long-term contract, and some from Condor," explains Müller. "This is not the case in other source markets, such as in the UK, Belgium and Sweden, where we satisfy demand for mainstream flying internally. We always said we would keep long-haul as an option, but this plan has been hit by the delay to the Boeing 787 [23 on order], particularly for the German market where this would be our aircraft of choice. With the strike at Boeing this is all up in the air again."
But Müller is pleased with how the merger with First Choice has gone. "The company is very satisfied with the merger, particularly in the UK where there was the largest overlap," he says. "The synergies are coming in according to plan, both on the cost and the revenue side. It was a no regret move and our businesses are very complementary. TUI was mainstream only, while First Choice brings all the specialist business to the table, which was not on our shelf before."
The strengthening Euro in particular is having a negative impact on the UK charter market, the largest in Europe, with a notable shift towards thousands more either taking holidays at home or putting their own packages together using low-fare airlines. "The UK charter market has been extremely tough," says Ian Lowden, managing director of consultancy RDG Solutions. "But it seems to be stabilising, although volumes are about 5-10% down on last year because of the twin effects of the credit crunch and the continued impact of the low-cost carriers. The smaller players are suffering particularly, with passenger numbers down, although some have managed to improve their position."
The first to react to this more challenging operating environment has been Astraeus Airlines. The London Gatwick-based Boeing 737 and 757 operator had diversified into scheduled long-haul flights, but has now pulled out of these and the inclusive-tour charter market to concentrate on sub-leasing, together with a small amount of ad-hoc work.
"There has been a polarisation towards the vertically-integrated groups, which are pulling more and more of their business in-house," says Astraeus chief operating officer Shaun Monnery. Furthermore, with fewer small tour operators to support the independent airlines, he adds that "we were fighting with each other for ever diminishing business. It has become increasingly difficult to generate profits from IT charters hence our decision to concentrate on sub-leasing". Also, asks Monnery, "why should the holidaymaker be tied to the traditional seven-day and 14-day package, when he or she can build their own short break, book a hotel and car hire and hop on a low-fare flight to Spain at short notice?"
Tim Jeans, managing director of Monarch Airlines, paints a contrasting picture of the UK market. Monarch has for some years been boosting its low-cost scheduled leisure flights from Gatwick, Luton, Manchester and Birmingham, which now account for 60% of its business. This year, says Jeans, has been better than anticipated with demand in the scheduled leisure market remarkably robust. "Monarch has benefited from a combination of adroit management of yields through charges for baggage etcetera, and judicious fuel hedging at a level below $90 per barrel. We were also helped by the demise of GB Airways, and our narrow and deep penetration of the scheduled network has also paid off for us."
On the IT charter front this summer, Jeans says Monarch filled all available charter slots at a virtual 100% load factor, and the winter ski business is increasing year by year. Only 10% of its programme is flown for in-house tour operators, and flying for third parties, especially Thomas Cook, for which it is an important provider, accounts for the vast majority of its charter business.
The diversity of our customer base is what is giving Monarch its resilience," says Jeans. There has been a fundamental weakness and overcapacity in the UK leisure market in recent years, but that has been alleviated by the disappearance of FlyJet and now XL Airways, and the withdrawal from the market of Astraeus, according to Jeans. The two vertically-integrated groups have also significantly reduced their fleets. "I am not saying that Monarch can walk on water, but we are well placed to weather any significant downturn."
But is there hope for the smaller players that lack market penetration and buying power in less intensive markets in Europe? Again, the picture is confused. "On the Continent, pure charter airlines are reducing in number," says RDG's Lowden. "Most are partnered or associated with main carriers, and the remaining are now offering a combination of charter and low-cost scheduled operations, or concentrating on ACMI only, offering capacity to third parties."
Italy's Blue Panorama Airlines is one charter carrier that has successfully diversified into low-fare scheduled services with its Blu-Express operation. It had a good summer season, especially on short- to medium-range flights, with demand steady in the Mediterranean and strengthening in the Red Sea market. President and part-owner Franco Pecci also projects a healthy winter season, with the emphasis on the Red Sea and on long-haul routes to Central America, Kenya and Thailand.
In the longer-term, Pecci is concerned about the delay to the Boeing 787 programme, which means the cost-savings expected from the new aircraft will not be realised as planned. "We have calculated that an 18-month delay will cost Blue Panorama around $150 million," he reveals. "We have asked Boeing for some help, but have not yet received a positive response."
Pecci is confident that the airline will survive the current downturn. "We have a low-cost structure and keep a close eye on our expenditure," he says. "We are also diversifying with our short- and medium-range fleet, combining our charter activities with low-cost schedules under the Blu-Express brand. Our low-cost segment is proving strong, especially on the domestic routes, and we are looking for two more Boeing 737s to expand."
He is equally upbeat about the long-haul programme, which is a scheduled operation, with about 65% of seats sold to tour operators. The charter/scheduled ratio of all flights is 72% charter and 28% scheduled, but Pecci would like to see this develop into a 50/50 operation. Blue Panorama has not yet faced competition from TUI and Thomas Cook, but Pecci feels that consolidation in the Italian market would strengthen the business. No such discussions have taken place, he says, but he would be happy to explore partnership possibilities either with an Italian carrier, or with one from Germany or the UK.
In neighbouring Switzerland, leisure specialist Edelweiss Air has aligned itself with Swiss International Air Lines, following the announcement in February of a strategic partnership between Swiss and travel giant Kuoni. Edelweiss Air will formally become part of Swiss in November, but will retain its own brand and autonomy. The co-operation is seen as a boost to both airlines.
"The collaboration is a win-win situation for everyone involved," says Swiss chief executive Christoph Franz. "And our customers will benefit from a wider range of products and services." Adds Swiss chief network and distribution officer and Edelweiss chairman designate Harry Hohmeister: "Edelweiss Air is already well-established in the Swiss market."
There still appears to be a place for the smaller, so-called destination carriers, where the market is so specific that it makes more sense to have a local carrier based at the destination. "We have one such carrier in our own portfolio, Jet4you in Morocco, where it makes sense to fly out of Morocco into the major European leisure markets, rather than operate isolated aircraft from these huge markets into Morocco," says TUI's Müller. "There is a lot of capacity in the North African rim but also in places like Turkey. Where airlines can say they have really found their niche, they are profitable and will always have a future."
Many industry pundits now believe that reports of the death of the IT charter business in Europe have been greatly exaggerated, although the recent failures give pause for thought. "There is evidence of a comeback in the popularity of IT, because it offers low and predictable prices to the cash-strapped UK and Continental customer," says Lowden.
He adds: "The powerhouses hope that their combined muscle and ability to offer super-competitive, all-inclusive deals will get them through these difficult years and they could well be right."