10-Mar-2016 7:30 PM

Airlines plan Europe summer 2016 seat capacity: growth accelerating due to LCCs and new models

Analysis

Airline seat growth from Europe is set to accelerate to 8% this summer, up from 6% in summer 2015, according to the latest schedules data from OAG. This will be the highest summer growth rate in six years. With summer 2016 starting in less than three weeks, the data are now fairly solid (although, of course, they are always subject to further change).

Capacity to Africa will fall and Asia Pacific will experience slowing growth from Europe, but every other region will experience an acceleration this summer. Intra-European seats will grow by 8%, with growth led by LCCs (including the low cost subsidiaries of the big legacy groups).The Middle East will continue to have the highest rate of capacity growth from Europe, but there will also be double-digit growth to Latin America and to North America.

This acceleration of capacity growth on the North Atlantic is partly due to the emergence of new competition, but also seems to be the result of incumbents switching capacity from elsewhere. This should perhaps be a source of some concern to the immunised JVs.

Summary

Airline seat growth from Europe is set to accelerate to 8% this summer, the highest summer growth rate in six years.
Capacity to Africa will fall and Asia Pacific will experience slowing growth from Europe, but every other region will experience an acceleration this summer.
Intra-European seats will grow by 8%, with growth led by LCCs.
The Middle East will continue to have the highest rate of capacity growth from Europe, but there will also be double-digit growth to Latin America and to North America.
The acceleration of capacity growth on the North Atlantic is partly due to the emergence of new competition, but also seems to be the result of incumbents switching capacity from elsewhere.
The top 20 airline groups in the Europe-Latin America market control 99% of seats, with seat numbers set to increase by 11% this summer.

Europe to all regions: seat growth accelerates to 8% this summer

According to data on flight schedules extracted from OAG's Schedule Analyser on 7-Mar-2016, total seat numbers from Europe to all regions will grow by 8% in the summer 2016 schedule, compared with summer 2015.

This is an acceleration from the 6% growth rate of last summer and compares with a compound average rate of 4% pa from summer 2006 to summer 2016. This summer's 8% increase is the highest growth rate in summer seat capacity since 2010, when it reached 10% following a contraction of 4% in 2009 (which was the only decrease in the past 10 summer seasons).

Highest growth on Europe-Middle East; slowing growth to Asia, cuts to Africa

Analysing the growth in seat numbers from Europe to each world region in summer 2016, the highest rate of growth will be to the Middle East (+15%, similar to the 14% increase in summer 2015), according to the OAG data. There will also be double-digit growth to North America (+12%, versus 6% last summer) and Latin America (+11%, compared with 4% in summer 2015), while intra-Europe seat growth will be 8% (up from 6% growth last summer).

In each of the preceding regions, summer 2016 growth will be higher than in summer 2015 and higher than the average growth rate since summer 2006 (average rates over the past 10 years have been 3% to 4% pa for seat capacity to every region from Europe, with the exception of Middle East, where the average has been 10% pa).

Two regions will experience a slowing of growth in summer 2016. Seat numbers from Europe to Asia Pacific will be up by just 2% (compared with 4% last year) and seats to Africa will decline by 6% (versus growth of 3% last year).

Growth in scheduled airline seats from Europe to region indicated, summer 2016 versus summer 2015, and compound annual average 2006 to 2016

Although compound average seat growth from Europe to most regions, apart from the Middle East, has been similar (3% to 4% pa), there has been some divergence in individual regional growth rates in recent years.

Growth to Africa, which has experienced the widest range of rates over the past decade, has consistently underperformed the other regions since 2014. The decline in capacity to Africa in summer 2016 reflects geopolitical events, in particular the aftermath of the Sharm El Sheikh bombing of Nov-2015 (seat numbers from Europe to Africa were also lower in winter 2015/2016, when they fell by 3.1% year-on-year.

Seat capacity growth on the North Atlantic has generally been accelerating since 2013, but the 10 year average annual growth rate of 3% pa in this region is the lowest.

This low growth reflects the relatively tight capacity control resulting from the dominance of immunised joint ventures in this market. However, the accelerating capacity trend also reflects increasing competition from newer and smaller participants and, in some cases, a switch of long haul capacity from other regions.

Growth to Asia Pacific has been on a decelerating trend in recent years and its 10 year average of 3% pa is only fractionally faster than the Europe-North America average. This deceleration has been the result of overcapacity concerns and weak yields (partly currency-related).

Latin America has experienced a sharp increase in the rate of growth of seats from Europe. Much of this acceleration in summer is due to a resurgence of growth in leisure routes operated by European airlines. Growth to the Middle East has been higher than to any other region in seven of the past 10 years. Superior growth to this region reflects the expansion of the three Gulf-based super connectors.

On short haul routes within Europe, seat growth has been steadily climbing since 2013, primarily as a result of LCC expansion (whether by independent LCCs or those owned by legacy airline groups).

Growth in scheduled airline seats from Europe to region indicated, summer 2006 to 2016

Lufthansa Group, Ryanair and IAG all have double-digit seat share

The chart below shows the top 20 airline groups in Europe, ranked by their share of total seats from Europe to all regions (including intra-Europe) in the summer 2016 schedule. These 20 groups will operate 78% of all seats this summer. For each of these airlines, the chart also shows its growth rate in summer 2016 compared with summer 2015, based on data on scheduled seat numbers extracted from OAG.

Not surprisingly, the top five airline groups by seats this summer are Europe's so-called 'big five', consisting of the three largest legacy airline groups and the two leading LCCs. In order of size by seats in summer 2016, they are the Lufthansa Group (11% of seats), Ryanair (10%), IAG (10%), Air France-KLM (8%) and easyJet (7%). They are closely followed by sixth ranked Turkish Airlines (6% of seats), but there is then a gap to number seven SAS (3% of seats).

Eight of the top 20 are increasing seat capacity at a double-digit rate in summer 2016, helping to drive the total market growth rate up to 8%. These eight are Wizz Air (growth of 21%), Flybe (+20%), Turkish Airlines (+15%), Ryanair (+13%), TUI Group (+13%), Aegean Airlines Group (+12%), Pegasus Airlines (+11 %) and easyJet (+10%).

Other groups, including some others among the top five by seats, are growing at rates that are faster than long-term trends this summer. Lufthansa Group's seat numbers will be up by 7%, to a large extent due to expansion by low cost subsidiary Eurowings, but also reflecting a resurgence of growth by Austrian Airlines.

IAG's growth of 9% is mainly driven by LCC Vueling, but also by BA and Iberia, while Aer Lingus is growing at a more modest 5%. Air France-KLM's seat capacity will be up 8%, in spite of a 2% cut by Air France, mainly due to growth by LCC Transavia.

Note that Norwegian, number 10 by seats this summer, is growing at 'only' 7% overall, but its growth is much higher than this on its long haul routes.

More modest seat growth is planned this summer by airberlin Group (+3%) and Alitalia (+3%). Note that the OAG data currently indicate that the Aeroflot Group will keep its seat numbers fractionally below last summer's level. However, Aeroflot has announced plans to increase capacity by 14% to 16% in 2016, which suggests that it has not yet filed complete data with OAG.

Europe to all regions: Top 20 airline groups by share of scheduled seats, summer 2016, and their seat growth versus summer 2015

Intra-Europe: 8% growth, led by LCCs

Seats on routes within Europe represent 86% of the total number of seats operated from Europe in the summer 2016 schedule. Not surprisingly, therefore, the 8% growth rate on intra-Europe is similar to that in the total market.

Airlines that are classified as low cost airlines in the CAPA LCC database account for 40% of the scheduled seats recorded by OAG on intra-Europe routes for summer 2016, up from 38% in summer 2015. LCC seat growth will be 13% year-on-year, while growth will be 5% for all other airlines in aggregate.

The top 20 groups by seats within Europe control 84% of capacity this summer, a higher share than the top 20 by seats from Europe to all regions.

The same eight airline groups among the top 20 that are implementing double-digit seat growth in the overall market to all regions from Europe are also growing at double-digit rates within Europe in summer 2016. Six of these eight are LCCs (Wizz Air, Flybe, Ryanair, TUI Group, Pegasus Airlines and easyJet). Turkish Airlines and Aegean Airlines Group are the only non-LCCs in the top 20 to be growing at more than 10% on intra-Europe.

The LCC subsidiaries of the Big Three European legacy airline groups are also growing rapidly within Europe this summer. IAG's Vueling and Lufthansa's Eurowings/Germanwings will both increase seat numbers by 15%, although Vueling's will still have 47% more intra-European seats than the Lufthansa Group's two LCC brands. Air France-KLM's Transavia will grow its seat capacity by 45% year-on-year in summer 2016, according to the OAG data.

Europe to Europe: Top 20 airline groups by share of scheduled seats, summer 2016, and their seat growth versus summer 2015

North Atlantic: growth accelerating as competition with immunised JVs increases

Europe to North America is the most important intercontinental market by seats from Europe, accounting for 4% of the total in the summer 2016 schedule, according to the data from OAG. Growth in this market is set to accelerate to 12%, from 6% in summer 2015 and in winter 2015/2016. This will be the highest summer seat growth rate on the North Atlantic for at least 10 years.

The top 20 airline groups in this market operate a combined share of 94% of seats, making it more concentrated than the total market and the Europe to Asia Pacific market (see separate section below).

Five airline groups have a seat share of 10% or more this summer, of which two are European and three are from the US (see chart below). IAG is the leading group, with 13% of seats, followed by Delta (12% of seats), Lufthansa Group (11%), United (11%) and American (10%). Three of the top five (Delta, Lufthansa Group and United) are growing at double-digit rates in summer 2016. Much of Lufthansa's growth is due to the launch of leisure routes by its Eurowings low cost brand.

Just outside the top five is Air France-KLM, with a seat share of 8%, which is growing at only 2% this summer. In seventh place is fast-growing Air Canada, with 7% of seats, increasing capacity at a rate of 19%. Eighth placed Virgin Atlantic, which has an immunised JV with faster-growing Delta, is only growing by 2%.

In addition to strong capacity growth from a number of the larger players on routes between Europe and North America, a number of less well established operators are also growing rapidly this summer.

Other airlines in the top 20 North Atlantic airline groups that are also growing at double-digit rates are number nine Turkish Airlines (growth of 34%), Icelandair (+31%), Norwegian (+51%), SAS (+25%), Thomas Cook Group (+59%), airberlin (+26%), LOT Polish (22%), Condor (+24%) and LCC Westjet (an increase of 4.5 times).

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Only three airline groups in the top 20 are growing at what could be called slow rates. As already mentioned, Air France-KLM and Virgin Atlantic will both increase their North Atlantic seat numbers by only 2% this summer, while Alitalia will cut capacity by 3%, according to OAG.

The three immunised JVs within the three global alliances continue to dominate the North Atlantic, although their combined share of seats will fall from 73% in summer 2015 to 71% in summer 2016. They will all grow this summer, but collectively more slowly than the market.

The JV within the Star Alliance (Lufthansa Group, United, Air Canada) will increase seat numbers by 13%, maintaining a 29% share of seats. The Oneworld JV (IAG, American, Finnair) will grow by 6%, but its seat share will drop from 22% to 21% (if Aer Lingus joins the JV, this will add around 2ppts to this share). SkyTeam's immunised JV (Air France-KLM, Delta, Alitalia) will grow by 7% and its seat share will dip from 23% to 22%.

It is, of course, far too soon to call an end to the hegemony of the immunised alliances on the North Atlantic, but the emergence of alternative business models is at least providing them with increased competition. Among those growing rapidly in this market are LCCs (Norwegian, Westjet), leisure groups (TUI, Thomas Cook), airlines emerging from restructuring (SAS, LOT Polish), global super connectors (Turkish Airlines) and mid-Atlantic sixth freedom operators (Icelandair).

Europe to North America: Top 20 airline groups by share of scheduled seats, summer 2016, and their seat growth versus summer 2015

Europe-Asia Pacific: growth slowing

The top 20 airline groups in the market from Europe to Asia Pacific control 81% of seats. The overall market between the two continents is set to increase seat numbers by 2% in summer 2016, slowing from 4% growth last summer. Disaggregating this a little, growth from Western Europe and Asia will be 6% and growth from Western Europe to Northeast and Southeast Asia will be 5.5%.

The leader in the total Europe-Asia Pacific market is the Aeroflot Group, with a 14% share, driven in part by its strategy of growing connecting traffic between Asia Pacific on the one hand and Europe and North America on the other. This also reflects the weighting of routes from Russia to former Soviet states in Central Asia (which are perhaps not part of what are typically regarded as the Europe-Asia market).

There is then a significant gap to second placed Lufthansa Group, with a 9% share, followed by Air France-KLM and Turkish Airlines, both on 7%.

The top five group is completed by S7 Airlines, with 5% of seats. Number six IAG is the lowest ranked of Europe's Big Three and has only 4% of seats, highlighting its relative weakness to Asia Pacific, although Iberia is to re-enter after a very long absence.

There are eight airline groups in the top 20 with double-digit seat growth this summer: Turkish Airlines (+17%), S7 (+16%), Cathay Pacific (+11%), Finnair (+13%), UTAir (+14%), Korean Air (+10%), Air India (+18%) and Yamal Airlines (+54%).

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However, Air France-KLM is reducing seat capacity in this market by 2% and the combined capacity of airline groups outside the top 20 is contracting by 24% this summer, according to OAG data. These factors are the cause of the overall slowdown in growth on routes from Europe to Asia Pacific.

Note that this analysis only examines direct capacity between the regions and so, does not take account of traffic connecting via hubs in the Gulf and Turkey. However, the growth in seats deployed in the market between Europe and the Middle East gives some indication of the increasing importance of such third party hubs in the Europe-Asia market.

Europe to Asia Pacific: Top 20 airline groups by share of scheduled seats, summer 2016, and their seat growth versus summer 2015

Europe-Middle East: high growth, dominated by the global super connectors (but Etihad growing slowly)

The top 20 airline groups between Europe and the Middle East have a combined seat share of 87% this summer, led by Emirates with 25% of seats in this market. This is the highest seat share for any operator in any market from Europe. Ranked second is Qatar Airways, with 12% of seats, followed by Turkish Airlines, with 11%, and Etihad, with 7%.

This demonstrates the importance of the four global super connectors in this market. Double-digit growth rates in seat numbers this summer are planned for Emirates (+23%), Qatar Airways (+18%) and Turkish (+23%), although Etihad is growing at only 4%.

El Al, ranked fifth in this market, will grow its seat numbers between Europe and the Middle East by 15% this summer (although it is essentially in a different market, mainly point to point, with Israel at the end of the line). A number of other top 20 groups in this market are also growing at double-digit rates this summer: Saudi Arabian Airlines, Pegasus, Aeroflot Group, AtlasGlobal, Oman Air, Aegean and Ukraine International.

Although this is the fastest-growing region for seat capacity from Europe in summer 2016, with growth of 15%, not all operators are growing rapidly. As already noted, Etihad is adding capacity at only 4% and Etihad equity partner airberlin is cutting capacity by 13% in this market, while Alitalia (another Etihad equity investment) is growing at just 1%. It is worth noting at this point that data for Alitalia may not be fully consistent with other data reported to OAG.

The Lufthansa Group will grow seat numbers by only 3%, Middle East Airlines will hold capacity at last summer's level and Royal Jordanian's growth will be 3%. Operators outside the top 20 are growing at only 1% in aggregate.

Europe to Middle East: Top 20 airline groups by share of scheduled seats, summer 2016, and their seat growth versus summer 2015

Europe-Africa: seat numbers are falling

The smallest markets by seats from Europe are Africa (2% of total seats from Europe) and Latin America (1% of seats).

On routes to Africa, the top 20 have a joint share of seats of 91% this summer. They are led by Air France-KLM, with 15% of seats, followed by Royal Air Maroc, with 10%. Third placed Air Algérie has 8%, while Turkish Airlines and Tunisair both have 7%. IAG is sixth, with 6%, just ahead of TUI Group, also with 6%, and Ryanair, which is the leading LCC in this region, with 5% of seats.

Although Royal Air Maroc, Air Algérie, Turkish Airlines, Tunisair, Air Arabia Maroc, TAP Portugal, Ethiopian Airlines and Air Austral are all growing at double-digit rates, total seat numbers will be lower by 6% on Europe-Africa this summer (compared with growth of 3% in summer 2015), according to OAG data.

TUI Group, Ryanair, Aigle Azur, Lufthansa Group, Thomas Cook Group and easyJet are all cutting capacity. Moreover, airlines outside the top 20 are reducing summer 2016 seat numbers on Europe-Africa by 44% in aggregate. Geopolitical concerns are the main concern.

Europe to Africa: Top 20 airline groups by share of scheduled seats, summer 2016, and their seat growth versus summer 2015

Europe-LatAm: growth accelerating, market dominated by European groups

On routes from Europe to Latin America, the top 20 airline groups control 99% of seats, according to schedules data extracted from OAG's Schedules Analyser for the summer season of 2016. This reflects a higher level of concentration than in any other regional market from Europe (although this is also the smallest market by number of seats, accounting for just over 1% of total seats from Europe).

Seat numbers will be up by 11% on Europe-Latin America in summer 2016, a significantly higher growth rate than the 4% increase in summer 2015.

European groups dominate this market, led by Air France-KLM (22% of seats), IAG (18%), leisure operator TUI Group (8%), the Lufthansa Group (7%) and TAP Portugal (6%). The highest placed Latin American group is LATAM, which is sixth with 6% of seats, fractionally ahead of Air Europa (also 6%). The Thomas Cook Group is ranked at eight, so there are two leisure groups in the top 10 (uniquely among the regions from Europe).

According to OAG, 13 of the top 20 airline groups in this market are growing seat numbers at double-digit rates this summer (see chart below). This is helping to push total market growth to 11% in summer 2016, up from 4% last summer. However, airline groups outside the top 20 are reducing capacity by 58%, further increasing the concentration of the Europe-Latin America market.

Europe to Latin America: Top 20 airline groups by share of scheduled seats, summer 2016, and their seat growth versus summer 2015

Growing competition with Europe's legacy airlines, led by LCCs on short haul and new models on North Atlantic

As the example of the Aeroflot Group demonstrates (discussed earlier), the schedules data analysed in this report are only as good as what the airlines notify to OAG. Moreover, airlines often make changes at short notice. As a result, any analysis of OAG Schedules must always be viewed as provisional, at least to some extent. In addition, there can be different nuances in the capacity trends depending on how sub-regions are aggregated (and this provides scope for more granular future analyses). Nevertheless, with these caveats in mind, OAG Schedules Analyser provides a rich and detailed insight into seat capacity plans for the coming summer season.

After five summers of seat growth in the range of 1% to 6% in markets from Europe, the 8% growth planned for summer 2015 represents a step-up to a rate of growth in excess of long-term trends. An acceleration in capacity growth is taking place in all regions from Europe.

In the biggest market by seats, the intra-European routes, this acceleration is being driven by LCCs, who appear to be set to make further gains in market share.

The second biggest market, the North Atlantic, is also the most important long haul market from Europe. Historically an important source of profitability for Europe's bigger network airlines, the concentration of market share in the hands of the three immunised joint ventures has further enhanced the importance of this market to these legacy airline groups.

However, the acceleration of capacity growth on the North Atlantic in summer 2016, and in particular the emergence of newer competitors with newer business models, demonstrates that the incumbents cannot afford to rest on their laurels.