The European sector is about to undergo a restructuring of unprecedented proportions

Failure has many fathers. The calamitous state of the European airline industry has been blamed on the US economic slowdown, decreasing premium-fare passenger numbers, foot-and-mouth disease, and the 11 September attacks and subsequent war making the public afraid to fly. The truth is recent events have simply hastened a crisis that has been brewing for years.

Analysts and airline heads agree the European airline sector is overcrowded, and that consolidation is the only logical outcome. EasyJet founder Stelios Haji-Ioannou told the UK press this week that "fourteen national airlines is about eight too many," while British Airways chief executive Rod Eddington predicted earlier this year that only "two or three" main players would survive the next few years.

Industry analysts have been more precise, forecasting that within 18 months only BA, Air France and Lufthansa would be left of the mainstream carriers, with a flourishing no-frills sector operating at the lower end of the market.

This could happen in one of two ways - either through mergers or through the collapse of the smaller and weaker carriers. Andrew Dark, airlines analyst with the investment bank Williams de Broe, doubts that there will be many airline mergers in the immediate future. Although there is a "momentum towards consolidation", says Dark, it will more probably occur through strengthening existing alliances rather than outright mergers.

First of all, government regulations on the industry are "massive pieces of grit in the wheels" of consolidation. Bilateral agreements, such as that between the Irish and US governments over Aer Lingus, prohibit foreign majority ownership of the national airline. Even now, with cross-border ownership commonplace in sectors from defence to communications, nations are still unwilling to see their flag carrier in foreign hands. And, while the European Union is trying to acquire the right to negotiate bilateral agreements itself, which would simplify take-overs from abroad, it is unlikely to succeed in the near future.

Even if these regulatory barriers were removed, European carriers will be wary of mergers in the present climate. Any merger will involve taking on a smaller and less stable airline - a risky move unless the acquiring carrier has a solid financial foothold, as few carriers at the moment do.

It is more likely, Dark and other analysts believe, that the immediate future will see a pattern of strengthening alliances in Europe, such as BA/KLM, Air France/Alitalia, and Scandinavian Airlines/Lufthansa, many of which may lead to official mergers three to five years later, and the collapse of airlines unable to find a suitable partner or local investor, with Aer Lingus, Olympic Airways and TAP Air Portugal in precarious positions after Sabena and Swissair.

Sabena's survival, even in its new form as a European regional airline, is uncertain due to the intense competition in the European regional point-to-point market. This comes from low-cost carriers like EasyJet, Go and Ryanair, and from the subsidised state-owned long-haul rail networks in mainland Europe.

While no-frills carriers have undoubtedly expanded the overall air-travel market by attracting leisure passengers from surface transport, they may also start to hurt mainstream regional carriers by taking away cost-conscious business customers. EasyJet in particular has started to concentrate on this market. It seems that their success is not merely a cyclical effect of the slowdown, but represents a permanent new feature of the European market.

With many famous names likely to vanish and new carriers taking on much of the low-fare market, the European airline sector faces a period of rapid change, which will not stop even when the world pulls itself back into recovery.

Shifts of this scale are rare - this one represents the final collapse of a system of protected national carriers dating back to the 1950s - and the fallout will be correspondingly severe.

The next five years will be a testing time for the entire European airline industry.

Source: Flight International