13-Apr-2018 9:26 AM

Europe Outlook: 2017, the year of the consolidation that wasn’t, 2018 heavily clouded by Brexit

Airline Leader

FOR EUROPE'S airline sector, 2017 was the year of the consolidation that wasn't. Three airlines went bankrupt, but only Monarch fully exited the market (representing less than 1% of seats in Europe). Monarch struggled with collapsing demand for Turkey and North Africa and the consequent yield depressing switch of competitor capacity into Spain. Both airberlin and Alitalia went into administration after minority shareholder Etihad Airways decided not to invest more funds.

Monarch, airberlin and Alitalia went bankrupt in 2017, with negative capacity impact, leaving Lufthansa to dominate some key routes;
Only Monarch's capacity left the market; much of airberlin's and Alitalia's continues;
Ryanair's pilot problems marred an otherwise successful year;
Europe's airlines are expected to achieve a 2017 EBIT margin similar to 2016's record.

Summary

Monarch, airberlin, and Alitalia went bankrupt in 2017, with only Monarch fully exiting the market.
Lufthansa dominates key routes after acquiring a significant portion of airberlin's capacity.
Ryanair faced pilot problems, but still had a successful year overall.
Europe's airlines are expected to achieve a similar EBIT margin in 2017 as in 2016, which was a record year.
Lufthansa Group, IAG, and Air France-KLM have the largest fleets in Europe.
Norwegian led the way in route expansion, launching narrowbody long-haul routes and planning to extend its network to Argentina.

Equity links* between Air France-KLM, Virgin Atlantic, Delta and China Eastern

Most of airberlin's capacity is being acquired by Lufthansa and easyJet, while Alitalia continues to operate in administration, with much of Alitalia's capacity likely to be operated by future buyers (Lufthansa and easyJet are bidders for parts of it).
Air France-KLM agreed to buy 31% of Virgin Atlantic, but this was driven by its planned integration into the Air France-KLM/Delta JV on the North Atlantic rather than by capacity rationalisation.
A very small amount of market capacity was trimmed by Ryanair's suspension of services to allow it to resolve a pilot rostering problem, an issue that also threw attention on its industrial relations.
Ryanair's problems tainted what was otherwise another successful year for Europe's most profitable airline, now four years into its 'Always Getting Better' customer service improvement programme.
According to IATA, Europe's airlines achieved a collective EBIT margin in 2016 of 6.2%, beating the 5.1% cyclical peak of 1998 and higher than in any year since then. Although unit revenue pressure eased in 2017, fuel prices rose and IATA forecasts a virtually unchanged margin of 6.3% for 2017.

Fleet sizes are still led by the big three.

Lufthansa Group, IAG and Air France-KLM have the biggest fleets in Europe;
All three big three major legacy groups rank lower by orders than by aircraft in service;
Air France-KLM is only 10th by aircraft orders, indicating its low growth;
Wizz Air, Turkish Airlines and Norwegian have most orders, indicating high growth.

Wizz Air's Nov-2017 order for 146 Airbus narrowbodies (72 A320neos and 74 A321neos) was the biggest of the year. With a total of 279 aircraft on order at 04-Dec-2017, it is the number one European airline group by outstanding orders, contrasting with its 13th place by current fleet in service.
Lufthansa Group has Europe's largest fleet, followed by IAG, Air France-KLM, Ryanair (the largest single airline fleet), Turkish Airlines, Aeroflot Group and easyJet Group. This top seven are comfortably ahead of the Norwegian led chasing pack.

Europe: aircraft on order by airline group*

There is also a clear top seven for aircraft on order, although there are some notable differences versus the ranking for aircraft in service.
But the top three by orders are Wizz Air, Turkish Airlines and Norwegian Group, whose rankings by orders outstrip their ranking by aircraft in service, indicating rapid growth. Turkish Airlines is likely to make a firm widebody order decision in 2018 after announcing in 2017 its intent to order 40 Boeing 787-9s (it may also order A350s).
Lufthansa Group ranks only fourth by orders, reflecting a more even balance between replacement and growth. The same holds for IAG, only sixth by orders. Air France-KLM, second by installed fleet, is only 10th by orders, reflecting slow growth (although an order for next generation narrowbodies is expected in 2018).
Route expansion is led by Norwegian

Norwegian launched the first narrowbody long haul routes from Europe in 2017;
Norwegian Air Argentina, its first operation based outside Europe, launches in 2018;
Primera Air will be the second European LCC to operate long haul routes in 2018;
IAG's LEVEL and Air France-KLM's Joon both launched in 2017.

Long haul low cost captured headlines in 2017 and this will continue in 2018. One of the more eye catching developments was Norwegian's launch of narrowbody trans Atlantic operations, deploying 737 MAX aircraft.
In summer 2017 it commenced 10 routes from Edinburgh, Belfast International, Cork, Shannon and Dublin to three secondary US airports: Stewart, Providence and Hartford Bradley. Norwegian plans future trans Atlantic flights with the A321neoLR, as do TAP Portugal and IAG's Aer Lingus.
Norwegian will extend its network to Argentina in 2018, with a London Gatwick-Buenos Aires service, before launching Norwegian Air Argentina, its first operation based outside Europe. It will operate both domestic and international flights.
Fast growing Icelandic owned Primera Air will become the second European LCC to operate long haul routes, when it flies to New York Newark and Boston from London Stansted, Paris and Birmingham in summer 2018. It will also use narrowbodies (initially A321neos and A321neoLRs, but also 737 MAX 9s from 2019).
IAG's long haul low cost subsidiary LEVEL launched in Barcelona in Jun-2017 with routes to Los Angeles, Oakland, Punta Cana and Buenos Aires. Originally a defensive response to Norwegian's long haul plans from Barcelona, IAG will add Paris Orly as a LEVEL base to in Jul-2018 (to Montreal, New York, Guadeloupe and Martinique).
Lufthansa's point to point airline, Eurowings, which operates both short/medium haul and long haul, continued to grow in 2017, wet leasing aircraft from airberlin and largely absorbing Germanwings by the winter. Air France launched the not low cost, but lower cost and millennial targeted, Joon in Dec-2017.
20 years after easyJet started flying to Germany, 2018 will mark its entry into Berlin Tegel, and its first German domestic services, following its acquisition of 25 aircraft from airberlin.

Primera Air and Primera Air Nordic: annual seat capacity 2014 to 2017*

The outlook necessarily remains heavily clouded by the uncertainty of Brexit going into 2018.

A number of partnership developments will take place in 2018;
Eurowings will expand through Brussels Airlines, airberlin and parts of Alitalia;
The test in 2018 will be to maintain or better the record margins of 2016 and 2017.

Brexit remains a significant source of uncertainty for Europe's airlines into 2018, particularly regarding the future traffic rights regime once the UK exits the European Union in Mar-2019. Airlines' preference for planning their schedules around a year in advance means they will need significant clarity by the start of summer 2018. The UK has said that it wants to remain in the European Aviation Safety Agency, but it is not yet clear if and how this can be achieved.
As ever, Europe will also face other geopolitical uncertainties in 2018, whether stemming from its relationship with Russia, the Trump administration in the US, events in the Middle East and North Africa, or the civil war in Syria.
Partnership developments in 2018 will include Virgin Atlantic's entry in the Air France-KLM/Delta JV and may include Aer Lingus' admission into the British Airways/Iberia/Finnair/American North Atlantic JV.
Air France-KLM will extend its codeshare with India's Jet Airways into a deeper commercial partnership. There may also be further developments in IAG's already close partnership with Qatar Airways and Lufthansa's looser one with Etihad.
easyJet's 'Worldwide' connections service, facilitating connections with partners' long haul flights, may extend to new collaborators in addition to Norwegian and WestJet. Ryanair may finally announce its own long haul feed agreements with partner airlines.
Lufthansa's Eurowings is expected to expand further in 2018, with the closer integration of Brussels Airlines alongside the absorption of aircraft acquired from airberlin and the possible acquisition of parts of Alitalia.
The challenge for Europe's airlines in 2018 will be to maintain or improve on the record high margins of the past two years.

Europe: EBIT margin for commercial airlines (% of revenue) 1993 to 2016