Consolidation is changing the landscape of the European airline industry and a new order is developing, in which three key players - Air France-KLM, British Airways and Lufthansa - are gradually increasing their market strength by scooping up their smaller rivals. Quite where this will leave smaller European players remains to be seen, but question marks are already forming over their future viability.
Lufthansa in particular has been extremely active on the consolidation front of late. The German carrier has signed an agreement to acquire a 45% initial stake in Brussels Airlines' parent company, SN Airholding, with an option to acquire the remaining 55% after 2011. Lufthansa is also among the bidders seeking to acquire a 42.75% stake in Austrian Airlines Group from Austrian state holding company OIAG, and is rumoured to be discussing a possible tie-up with SAS. There is also the long-running question of the future ownership of bmi, in which Lufthansa holds a 30% stake and an option to acquire Sir Michael Bishop's 50% plus one share stake.
Lufthansa says its consolidation moves are driven by profits rather than a desire to be one of the largest carriers. "The important thing is not being number one just for the sake of being number one," it says. "The idea we followed with Swiss, where the airline keeps its own brand with its own strengths and is integrated into the company with multi-brands, has proven to be a success and this will be the idea for the future."
Snapping at Lufthansa's heels and ever present at every consolidation opportunity, Air France-KLM is also in the running for the stake in Austrian Airlines and is keen to participate in a revived Alitalia, if the new business plan for the beleaguered carrier ever gets past the unions and becomes a reality.
The consolidation path followed by Air France-KLM and Lufthansa is centred around a multi-hub strategy. In addition to its German hubs, Lufthansa has a hub in Zurich through its acquisition of Swiss and will soon have a hub in Brussels through its latest acquisition. Meanwhile, Air France-KLM has dual hubs at Paris Charles de Gaulle and Amsterdam Schiphol.
But the strategies of Lufthansa and Air France-KLM have yet to be adopted by BA, as Nick Van Den Brul, an airline analyst with Exane BNP Paribas, points out: "Lufthansa and Air France-KLM are following a multi-hub strategy but BA really hasn't done that yet - the jury is out on whether it can do that with Madrid [through its planned merger with Iberia]."
What these three players do have in common, however, is a strategy to strengthen their markets through consolidation. "It's not a question of buying an airline, it's a question of buying into a market. It's about improving your market position," says Van Den Brul. "That's why Air France-KLM is interested in Alitalia - not because it is a good airline but because Air France-KLM is interested in the Italian market, which is very rich."
But where does the increasing dominance of these three airlines leave smaller European flag carriers? "Nowhere," says Van Den Brul. "Unless an airline has a very specific niche, it's difficult to see it surviving."
Looking at all the planned mergers and acquisitions from a legal perspective, Jürgen Werner, managing partner at Brussels-based law firm Norton Rose, does not anticipate any major issues with the European competition authorities. "If it's prepared well, an application to merge might get through in the first phase. For instance, Lufthansa/Brussels Airlines will likely go through in the first phase," says Werner.
"Lufthansa/Austrian or SAS would likely go to a second phase, which will add an extra couple of months. I can't foresee these mergers not going through, but some might take longer than others and some might have to give up slots."
Werner points out that the Lufthansa/Brussels Airlines deal "should be relatively easy" as they don't have a huge overlap, whereas with the BA/Iberia deal "from a competition point of view there are lots of restraints as they have a relatively strong position on the Iberian market, especially to Madrid, so it could be more difficult".
SN Airholding's Etienne Davignon and Lufthansa's Wolfgang Mayrhuber hold a joint news conference at the offices of Brussels Airlines