Europe's carriers as a whole saw net profitability almost wiped out in 2011. This year has already witnessed high-profile airline casualties, and the Association of European Airlines (AEA) projects operating losses among its members of around €1.5 billion ($1.8 billion). Traffic and economic growth forecasts for large parts of the region are flat or negligible. And all this assumes that governments can resolve the sovereign debt that hangs over the region.
"2012 was predicted to have a gloomy, uncertain economic outlook," says AEA's acting secretary general, Athar Husain Khan, "and our forecasts are proving to be accurate."
The climate of course differs by country and carrier. Airlines operating in fast-growing European markets outside of the EU, like Turkey and Russia, grew strongly in 2011. And within the EU, low-cost carriers have, in the main, kept a grip on profitability.
It is network carriers large and small within the EU that are feeling the sharpest pressure. Europe's big three network carrier groups - Air France-KLM, International Airlines Group and Lufthansa - are all restructuring parts of their businesses, notably in short-haul operations. The financial figures for all three have, to differing extents, been weighed down, not just by higher fuel costs and the weak climate, but by under-performing parts of the business.
Lufthansa's net results were hard hit by costs associated with loss-making BMI - and its sale to IAG. Iberia's performance within the latter group lagged behind the robust British Airways performance, while Air France contributed largely to the group's overall operating loss last year.
At the other end of the scale, the tough environment, combined with a regulator clamping down on state-supported excesses of the past, makes survival the name of the game for many mid-sized European operators. Many cannot confidently predict that they can do so alone. Malev, Spanair and Cimber Sterling have fallen by the wayside already this year. Small wonder foreign investors, such as Etihad, which has already helped to rescue Air Berlin, are in demand.
The difficulty for these carriers is that there appear to be many more airlines on the block than suitors. Europe's big carriers are busy getting their own houses in order, leaving them with little investment appetite for anything other than strategic no-brainers - such IAGs move for Heathrow-slot-laden BMI.
This leaves most of the potential saviours coming from outside the EU. There has been some activity. Gulf carriers Etihad and Qatar Airways - through its investment in Cargolux - have already shown an interest.
Turkish Airlines is also an active observer, though it was dissuaded from investing in LOT Polish Airlines by the limitations in foreign ownership levels by non-EU carriers and quickly distanced itself from moves to invest in Aer Lingus for similar reasons.
Aer Lingus is one of a number of small or mid-sized European carriers where stakes are on the market. It is though in the enviable position - or unenviable depending on your perspective - of having at least one declaration of interest already from a bidder in the guise of existing shareholder and noisy neighbour Ryanair.
Amid this tough environment, attention has again turned to tackling costs. Air France-KLM's Transform 2015 programme aims to cut its net debt by €2 billion; Lufthansa is targeting €1.5 billion in efficiency gains by 2014; Finnair aims to save €140 million by 2014; SAS aims for SKr5 billion ($749 million) in savings during 2012-13.
"If you look at the really successful airlines, the carriers that are thriving, a combination of network and low-cost carriers, are those with an unrelenting focus on costs," says Emre Serpen, head of airline practice at the Intervistas Consulting Group. "[The challenge is to] keep reducing costs, focus on quality and give enough difference to the customer. Decide what your strength is. That's where the good CEOs come in. They manage to maintain the short-term focus, but don't lose sight of the strategic focus."
Peter Morris, chief economist at Flightglobal consultancy Ascend, says no network carrier will ever get their costs down to match those of their low-cost counterparts. "There are certain sticking points for the legacy carriers, things like pilot conditions," he says, yet notes the market means these carriers have to tackle such issues to compete. "You don't have an option to ignore the market - it's what the market is willing to pay," he says.
"They have to carry on focusing on cost reduction, yet have to be conscious there will always be a gap, so it comes back to frequency, and service enhancement," he adds.
The challenge, though, is that evolving low-cost carriers continue to encroach on the traditional network carrier territory - increasing frequency and enhancing their product offering to appeal to business travellers. "[Network carriers have] got to look at it objectively on what the value is of these services [they offer]," he says. "What else have you got other than a bottle of champagne? What are the weapons they have left to fight with?"
So a decade on from the first European network carrier responses to the arrival of low-cost outfits, the incumbents in many ways find themselves back at square one and renewing their attack on short-haul. This is crucial in order for their overall business to work. Carriers must find a way to retain their feeder networks without wiping out their long-haul profits in the process .
Europe's big three carrier groups are taking steps to address short-haul. Lufthansa will decide by spring 2013 how to restructure its intra-European network and merge its in-house narrowbody operations with low-cost subsidiary Germanwings; Air France has made overhauling its short and medium-haul operations central to its restructuring; and IAG launched Iberia Express to tackle short-haul challenges in the Spanish airline's Madrid operations.
IAG is following a similar model at Iberia Express as Iberia chose with Click Air - the budget operation it launched to operate short-haul out of Barcelona and which ultimately merged to form Vueling. With the axe hanging over Bmibaby, Vueling is one of the two last European network carrier budget affiliates left standing, along with Lufthansa's low-cost unit Germanwings.
Vueling's chief executive, Alex Cruz, believes one of the keys to its success was that Iberia has given the carrier its independence. "The starting point was we are going to let the people go and do it, and that was a big leap of faith," he says.
"If you are a big airline, unless you are in a position of severe financial stress and you have the support of the government, the task of restructuring the short-haul operation is difficult," Cruz adds.
He believes there is likely to be a move to lower-cost platforms two ways - "the friendly or unfriendly way". Either will be through competition from low-cost carriers, which will have a substitution effect - while also growing the market - or through co-operation between the network carrier and low-cost partner, such as being seen with Eurowings/Lufthansa or the creation of Iberia Express.
"The 40-120 minutes flight segment will continue to be the industry's premier battleground," Cruz adds.