Europe Market Outlook: Slow And Steady Wins The Race? The Ongoing And Gradual Restructure Of The European Airline Market

Transcript

Peter Harbison:Okay, well, I think, I mean, I think we can be pretty, pretty broad in our approach here in terms of what's happening in Europe. But let's start with what's on the agenda in terms of, you know, this is an industry obviously, and we've got representatives of different parts of it here. Quite a good cross-section, in fact. Even a legacy airline, which isn't really a legacy airline. I don't think you'd call yourself legacy, would you?

Rafał Milczarski:I think we were a legacy airline in 2012 when we almost went bust. I wouldn't call ourselves a legacy airline anymore, but—

Peter Harbison:Full service.

Rafał Milczarski:There is a legacy in the past, yes.

Peter Harbison:There is a legacy. So let's talk about consolidation. It's something that— talking yesterday with Carsten Spohr, It almost seemed inevitable that the industry was going to consolidate in Europe particularly. And we've seen— obviously, we've seen a fair bit of it in the last couple of years, last year particularly. But consolidation isn't all that easy, first of all. Exit from the market seems to be getting easier and easier for airlines outside the big 3 and their spheres. What do we see in terms of the market consolidating?

Jiri Marek:Yeah.

Peter Harbison:You're in quite an interesting position from that point of view in Alitalia.

Jiri Marek:I was expecting that. You brought it up.

Peter Harbison:What does it look like from your perspective? I mean, and you can stand back a little bit and not just be Alitalia. I mean, from an airline perspective.

Jiri Marek:I would say there are 2, let's say, contracting— contraindicating powers driving this in Europe. On one hand, if you are in an airline, obviously, you know that the consolidation is inevitable. It has a business logic. On the other hand, we heard that also yesterday here, you have the European, let's say, power which is trying to equally develop all the region and redistribute the wealth that we are all equal, not on a country level, but also on a region level. Great example, like yesterday you hear the opinion of Carsten that there is enough to hub in Germany. They have no aspiration to create Berlin, but the Berliners and Berlin authority will never want to hear that, and they will do all possible means to create another hub in Berlin, which is going against the consolidation and slowing down. Yes, it's inevitable, but I don't see that in Europe it will be happening fast because their entry level to start a new airline is relatively very easy. Whatever will consolidate, there will always create a white spot that someone else will come in. It will not happen like in the US. That's my— Javier?

Peter Harbison:Yeah, so this is the battle between diversification and consolidation, and you see that. But I mean, the point that— and maybe if we could move along to easyJet— the point I think that was coming through yesterday was, well, really, you've got to be big to survive because we're going to crunch you if you're not big. Is that— I mean, easyJet's big now, obviously, Javier, one of the, one of the biggest carriers in Europe. Yeah.

Javier Gandara:Yeah, well, I mean, we're already big. We're the 4th biggest carrier in Europe. But then when it comes to consolidation, I think it's important to really mention that there is 2 types of consolidation in the airline industry. On one side is when you've got the umbrella companies that having different brands, the IAG model or the Lufthansa Group model, for example. In our case, we really believe that— we truly believe, while Joffre mentioned before that it's a commodity where we are in, well, It is true for some segments, but not overall. We do, we do believe that brands are still important. So in our case, whenever we do any M&A activity— and we have done 3 in our history, Go, then GB Airways, and lately parts of Air Berlin— is that we truly want to integrate it into our operations. Because the consumer, first, they don't know about regulation, different AOCs. And second, even the ones that do know, they could not care less. And the Air Berlin acquisition, it's really a good example of that. So on the 5th of January, we We started the first flight, and then it took us a few months, and now we've got almost 25 aircraft operating truly as easyJet. And the good thing of this is that for the consumer, they see no difference in terms of that structure, no? So then that is of course making consolidation much more difficult, because then it's not so straightforward just acquiring an airline and then just bringing a separate brand, a separate airline, as much as easyJet.

Peter Harbison:Okay.

Javier Gandara:Integrating. So our approach to consolidation pretty much is threefold. First, it needs to be within our strategy, which in our case is just building number 1, number 2 positions in key cities in Western Europe.

Peter Harbison:Mm-hmm.

Javier Gandara:Second, the commercials should be okay. And third, we should not underestimate that operationally we should be able to integrate it in a way that is seamless for the consumer. With that in mind, then you cannot see so many opportunities, at least for easyJet, to be able to keep consolidating. But nevertheless, we keep just having our organic growth, and right now we have almost reached the 90 million passenger mark. And we truly believe that with our own organic growth, then we will still be just seen as one of the key brands in the airline industry in Europe.

Peter Harbison:I mean, the way I would interpret what, what's happened with easyJet recently is, I mean, it's not Consolidation is not a strategy because you're big enough, you can continue to grow organically. And the Air Berlin thing was really just opportunistic. It happened and there was an opportunity, so you took it rather than having a strategy to, to get involved in consolidation. You're big enough now, you've probably reached that critical mass where you can actually just grow organically.

Javier Gandara:Well, we just mentioned that our 5-year plan is around growing between 3 to 8% organically. Of course, we would be out there just seeing if there is any opportunity. But again, we would only be proceeding that path if it ticks those 3 boxes, that it matches strategically, commercially, and operationally.

Oliver Wagner:Mm-hmm.

Javier Gandara:Then, in the absence of that, we just keep growing our presence. We've got already more than 300 planes, 90 million passengers. Then, something which is really important for us, a real pan-European brand. that is well known in all the key markets where we operate. And that for us is a strength and actually is adding value to our consumers, which they really trust the easyJet brand, they come for it. And then as a result of that, then we believe, yeah, that even organically alone we can just keep delivering our strategy, which is not ruling out doing other things. Air Berlin is a good example, what we did in Berlin, but it still is not going to really be our main focus.

Peter Harbison:Because you've evolved to become an airline that isn't really like any other airline in Europe, haven't you? You started out as very much a low-cost carrier. You've become a business travels carrier. You operate to, to, to main hubs. And, and so you, you really are straddling very much, not like a Ryanair, although Ryanair is moving a little bit in that direction, but yet not like a full-service carrier. You In many ways. So it must be hard for you to look at consolidation and keep those 3 things in mind. I mean, because there's nobody really quite like you.

Javier Gandara:Well, it's funny because we were discussing before about the term legacy carrier and low cost. Well, in reality, I don't believe that legacy and low cost have sense any longer. Normally, the way we approach is that right now you've got network carriers and point-to-point carriers. And even that difference are being blurred because, well, you can see point-to-point carriers doing connecting traffic. Or you can see carriers like easyJet filling some long-haul. So I think at the end of the day, the business model label is just something that we do ourselves, but for the consumer, it's irrelevant. So then really what we truly believe is that the consumer is king, and what we truly believe is that companies like easyJet and others have changed completely the landscape and have made the lives of millions of people much better, because right now they can really just fly where 25 years ago it was a luxury for the very few.

Peter Harbison:Yeah, I'm not trying to put a label on you, but, but you are different, which is, which is, of course, I think, pointing that, making that point even more strongly. And therefore, to plug yourself into another— I mean, for example, if you want to have geographic coverage of Europe, you're not very big in Eastern Europe. Plug yourself into Wizz Air. Why don't you try and do a consolidation there? Now, how compatible would that be?

Javier Gandara:Well, we are really big in the markets we operate. We are the number one carrier in the, in the UK. We are the number one— number 2 carrier in France, on the Netherlands, for example. I could continue. So then in reality, even with that position, we still have around 10% of the short-haul market in all those regions. That's why there is still a lot to go forward. That's why when we are asked about long-haul— I'm anticipating already your question— we say, well, No, it's a distraction for us. We still have a lot to do.

Peter Harbison:But you're not answering my question.

Javier Gandara:So now going to your question. So for the time being, we really see so many opportunities organically in the markets that we are really big and we have a big brand that we don't see any real urge for really going into something different than this. Let's face it, integrating 2 airlines, it's really complex. So in our case, let's take again the Berlin example. So in a matter of months, we have managed to just integrate an airline the size of Monarch fully, completely with easyJet brand, with easyJet crew, and with everything. So that takes time. And also, let's face it, when you want to do the right thing— so for example, we are pan-European, and we employ all our crew in 8 different labor jurisdictions. We have respecting local terms and conditions, having collective labor agreements with unions in all of those 8. So that's not so easy to do. There is complexity enough. And then the way that the short-haul market is going into a hybrid model, because you can see that low-costs are becoming a little bit less and legacy or network just coming. So at the end, there is a hybridization.

Peter Harbison:Mm-hmm.

Javier Gandara:This hybridization is already adding a lot of complexity, because the pure low-cost model, the one that was created in the '70s in the US by Southwest, was flying to secondary airports, not offering anything. That's over. Now we are all, most of us, flying to main airports, doing all the things. That's already complex enough to really just add additional complexity. So then just to sum up, we truly believe there is a lot of opportunities in our key markets organically, and that's what we are going to be just aiming our strategy for.

Peter Harbison:Yeah, I mean, it makes a lot of sense. I mean, it's really just Darwinian, isn't it? You, you're adapting to a market, and the market is changing. You've got to change with it. And although, I mean, Joseph's attitude is totally different— we have a product that the market wants, and it's about price, and it's about commoditization. And we can stand out separately. And I think you're almost saying that from another part of the spectrum.

Javier Gandara:Well, I think it's got a very sound business model, and they're doing really good work. Well, they're democratising air transport on that side of Europe. So that's really, well, something to admire. But then let's have our focus, in our case, on what we believe is really our key strength, which is our brand. And the market, what we are really focused on.

Peter Harbison:Yep. Thanks. Oliver, I mean, consolidation, I guess someone fairly senior in your organization thinks it is a good thing. What do you think?

Oliver Wagner:Well, how could I say no? No, I think consolidation is certainly something that we've seen in the past, in the first decade. You know, with the with the takeovers of Swiss, for instance, or Iberia, and but that has been at a slower pace. But again, Jirzy talking about the U.S., that has been also a very long, a long process getting there where they are they are today. So I do think that process started. It really accelerated, especially in Germany. with the, with the, with the Air Berlin bankruptcy. We were certainly happy to acquire a significant portion of that. We would have loved to have a bit more, especially in Berlin. Congratulations, congratulations on that. But I think, you know, the Eurowings setup, when Lufthansa defined the Eurowings, or when we, when we started with the, with a growth plan in 2012, 2013, when we had 28 aircraft at that time. And meanwhile, we are together with Brussels Airlines, our colleagues, almost 200 airlines. We had 2 major goals. Number one is securing the decentral German market. Germany is a very decentral country with 2 major hubs in Frankfurt and Munich and other very strong catchments like Berlin, like North Rhine-Westphalia, like Stuttgart, like Hamburg. And And Lufthansa was not making any money over a decade in the first decade of this century. So Lufthansa said, all right, we want to secure this important catchment. And this was goal number one, objective number one for Eurowings. For instance, almost 30 million passengers we are transporting together with our friends in Brussels. almost 40 million this year. So it's a huge market that needed to be secured. That was number one. And number two, of course, was to drive consolidation with a, with a very special setup. And so we also succeeded, though it was a bit rough this, this summer, we have to, we have to admit. I guess everybody's happy that the summer is over and that we're now back on a, on a very— on a much smoother operation. But I think looking at Central Europe, so far consolidation has paid off well for us. And yeah, so we are in the final stages of digesting the Air Berlin bankruptcy. All the airplanes are now in operation since August. Operation is meanwhile stable, so—

Rafał Milczarski:And Ryanair?

Oliver Wagner:There are certainly a couple of learnings from this summer, but I think consolidation will go on and we'll—

Peter Harbison:Well, your form of consolidation, I suppose, in a way is more like a vertical consolidation. You've got— I mean, talking about the spectrum of different types of operator, you've got the whole array of operators within the Lufthansa Group, haven't you? So it's It's very much a— you can, you can be what you are, just as easyJet is what it is, but still be part of a consolidation process because you're fulfilling a particular role in there. While I think of it, just, just jumping, what about Eurowings establishing a major hub in, in Berlin?

Oliver Wagner:Sorry, the acoustic is a bit, a bit, a bit tough.

Peter Harbison:So, question not to hear.

Javier Gandara:No, no, it's true. We can hardly hear you.

Oliver Wagner:Sometimes it's really hard to hear.

Peter Harbison:I know, I know. It works both ways.

Oliver Wagner:Can you repeat?

Peter Harbison:I was just wondering if it would be a good idea for Eurowings maybe to establish a hub in Berlin.

Oliver Wagner:I guess Mr. Spohr answered this question already.

Peter Harbison:You don't want to hear that?

Oliver Wagner:So, right. Well, you know, let's be open. easyJet got the biggest chunk for Berlin. Right now there are no, there are no slots here at all.

Peter Harbison:I'm thinking of 2020.

Oliver Wagner:We're thinking of 2020. There are no, there aren't any slots either. So at this airport, the terminals are already, already operating at the capacity. And so right now we have a very stable operation. We have a very significant share in, in, in Berlin. But right now there is no plan for—

Peter Harbison:but sorry, there was, there was a serious side to the question, and that is when you've got this vertical consolidation, just to call it vertical consolidation, it does give you the opportunity, doesn't it, for different parts of that group to play different roles? So, I mean, you can be the stalking horse for easyJet, for example, in a new Berlin airport.

Oliver Wagner:Yeah, absolutely. So one, again, one of the roles is of course defending the German, the German markets, and we're certainly having a Tough competition on some, on some, on some routes. But yeah, major objective, or one of the major objectives, is to secure the German, the German decentral markets, not only via metal but also keeping the customers in the Lufthansa Group system via a very, very comprehensive offer, very big portfolio via Miles More that we are, that we are offering on all our flights as well. And yeah, again, Berlin is still a battleground.

Peter Harbison:Okay, Rafał, you've been sitting here very patiently. Sorry to take so long. I mean, now you're in a totally different situation. You're a relatively small flag carrier, but a flag carrier in a market. You've got a lot of low-cost competition. How attractive to you is actually looking at other similar types of operation, or even, you know, in my term, vertical, of looking at consolidating perhaps with, or establishing a lower-cost operator, as many airlines have done, as the Lufthansa Group has done? I mean, is consolidation a thing for you, or are you just, again, like easyJet, are you more inclined just towards a sort of organic growth?

Rafał Milczarski:I'm naturally more inclined to organic growth, although of course People take various opportunities opportunistically. I just, I felt it's quite interesting to observe the following pattern. It's more easy in the US to consolidate because there are no national barriers, and any type of consolidation, you know, has less of a nationalistic meaning.

Peter Harbison:Mm-hmm.

Rafał Milczarski:Whereas in Europe, we have various countries that are absolutely proud of their history for right reasons.

Peter Harbison:Sometimes.

Rafał Milczarski:Part of that pride, part of that pride, of course, is the existence of a national carrier. And, you know, this is— this has been a hindrance to consolidation in Europe, I think. So the cases of consolidation that we have seen are a result of a bankruptcy of one other or next carrier. And I guess, you know, what we've seen also is that the market doesn't know a vacuum. The vacuum is immediately filled by somebody, sometimes in a market-oriented process, sometimes in a process that I would certainly have doubts whether it is or should be permissible. But, you know, I mean, it's a fact. So of course, we'll have our eyes open, but, you know, I think— and I agree here with Joseph Varady— what every carrier has to focus on is cost, irrespective of what, you know, what model of ticket sales they actually use, whether they sell through agents or through their website. The adherence to the lowest possible cost is actually the insurance policy for survival in tougher times.

Jiri Marek:Yeah.

Rafał Milczarski:So this is something that we absolutely want to focus on. I think we've demonstrated that we can do organic growth quite well initially in our home market, but I think, you know, there are signs that we are, that we are also active outside of our home market, which is— our home market, of course, is the Warsaw, Warsaw Airport, Warsaw hub that we're trying to To build against all odds because the airport is rather not a hub airport, but we've managed to build quite an effective hub there. So I think it's— actually, I think it's an exciting market, and I'm looking at all my larger competitors with, well, first of all, with great respect, secondly, with interest.

Peter Harbison:But not with fear?

Rafał Milczarski:No, I don't think I don't think fear is something that's— that business— that is a business factor, you know.

Peter Harbison:I think it's fundamental to business as well.

Rafał Milczarski:I look at costs with aggression. That's what I— that's how I want to treat life. And, you know, once— I completely agree with Mr. Varady. Once you have the low cost, you can look at your competition in a relaxed manner. Of course, you learn from them. This is exactly, you know, how market forces play.

Peter Harbison:But you're still a small carrier. I mean, in the, in the medium term, in a market where people are big and tough and they have, like the Lufthansa Group or even easyJet, real power in the market, and they can absorb a couple of seasons of losses quite significantly, not that they've done that, but you can't. You're okay, you're a flag carrier, And we— and I'm not that I'm comparing you with it, but we've seen what happened to Malev as a flag carrier. I mean, it's a small airline. How can you look out to the future without some sort of partner? I mean, organic growth is hard, isn't it?

Rafał Milczarski:Well, our strongest partners are our customers. And clearly, they like something that we offer because They're coming to us in growing numbers. When I was starting this job, we completed the year with 4.3 million passengers. I think we're going to approach 9 million passengers this year. Of course, relative to the largest carriers in Europe, that's still nothing, and we have to put it in perspective. But I think we've demonstrated that when you focus on the right things, you can actually You can actually develop the business. Of course, there is a limit to it, but I think we actually have very favorable macro conditions because our, you know, let's put it this way, I define the region of our activity, the Central Europe, it's one of the most interesting regions where actually, you know, people are growing richer and richer. They are very ambitious. This means market growth. This basically means that we don't have to grow at the expense of anybody. We can grow just in order to satisfy those people's needs. I think this is a very beautiful thing because, you know, in the Western European dimension, there are a lot of hindrances. For example, the capacity of of airports, you know, that is a driver of value, of course, because as the airports are near capacity, the slots become more valuable. It's more difficult to access the market, hence the ticket prices become higher and the airlines earn more. I'm sorry if I'm—

Peter Harbison:No, it's easy to follow.

Rafał Milczarski:Covering a big secret, but this is exactly how it works, which is why I think this is This is actually going to be a very interesting issue in the pan-European sense. How do we handle the genuine demand growth? Because there is going to be very significant demand growth across Europe, but I think particularly in Central Europe. An average Pole, they fly about 1 time per year. An average German flies more than 4 times per year. I mean, that's the comparison. And of course, Germany is a much more significant economy with a lot of rich people and everything else. But actually, you know, all these economies of Central Europe, Poland, Czech Republic— sorry, Czechia, Slovakia, Hungary, Romania, Bulgaria, yes, they were on the wrong side of the Iron Curtain. Yes, they are underdeveloped in that sense. But all the people who live there, you know, they're very well educated. They really have the brains because you can say a lot of things about communist and post-communist societies, but they did make— they did democratize education. So these people have brains. I think brains is the most important factor in the new economy. So I think basically these people will fly more, they will want to enjoy life more, and, you know, we want to grow for them. So, We don't necessarily have to take anybody over. We just want to grow in order to provide the services for these people. So I'm not going to engage in a fight. I'm not going to attack anybody. I have great respect for Ryanair, Wizz Air, Eurowings, Lufthansa, easyJet, Alitalia. I mean, all you people are wonderful. We just want to play our game in Europe. in what we define as our market of interest, and I think this is a very interesting market. I think this market will grow dramatically. I think there is, within the next 20 years, it's going to go by the factor of 3 or something like this. I think we just need to be there to be able to supply the needs of this market. I think another dimension is the underdevelopment of infrastructure. Within the region. We have some regional airports, but we know that Western European hubs are nearing capacity, and I don't think with the NIMBY attitude of many Western European societies— NIMBY, not in my backyard attitude— it's going to be difficult to expand airport capacity. It so happens that Central Europeans are more happy to have airport capacity built and expanded around them. So I think, you know, the sort of the hubbing center of gravity will also be shifting eastwards somewhat. Certainly, Poland is going to build a new hub airport.

Peter Harbison:It's just— sorry, but yeah, I think that's a really, really good point, and it's something that obviously is going to influence strategy, particularly airline strategy, particularly in Western Europe over the next decade. Very, very strongly, just the, the infrastructure constraints. But just going back to the partnership thing, the fact that you're a fairly small carrier and a flag carrier, it seems to me in a lot of ways another form of partnership, of course, is global alliances. And in a lot of ways, your biggest and toughest competitors are in your global alliance, aren't they?

Rafał Milczarski:I don't—

Peter Harbison:You're out— I mean, even though you're nice about them yesterday, you're outside the, the closed joint venture on the Atlantic, for example.

Rafał Milczarski:Yes, we are outside and we are happy that we are outside.

Peter Harbison:You haven't always been happy though.

Rafał Milczarski:Well, there have been various, you know, the journalists, they have this quality of, I mean, at the beginning of my term as LOT CEO, they were asking me questions. So do you want to go out of Star Alliance or Miles More and stuff like this? And I was just, you know, I ignored them, to be frank, because I needed some time to think about it. And, you know, frankly speaking, I, you know, I think, you know, Lufthansa is a— I mean, because you're obviously referring to Lufthansa Group, they are a very strong—

Peter Harbison:Star Alliance.

Rafał Milczarski:Yeah, well, but Lufthansa is, you know, is the strongest European member of the Star Alliance. I have a lot of respect for this company. They serve and serve very well.

Peter Harbison:You're on the outside of the joint venture, aren't you? You're competing against them.

Rafał Milczarski:We are on the outside of the joint venture.

Peter Harbison:They can share information, they can They can share fares data, they can rationalize capacity, and they're competing directly against you. So, I mean, the broader question I was getting to though is, is— are the global alliances actually a place you can go to for refuge if you don't do consolidation?

Rafał Milczarski:I don't think they are a place where you can go for refuge because there is, there is more and more cooperation, very close cooperation, joint venture cooperation within the alliances. Actually, From the point of view of the customer, these joint ventures are really strange phenomena, I would say.

Peter Harbison:Okay, we'll leave it at that. Yeah, we won't go— Jiri, just—

Rafał Milczarski:But let me finish. But they happen within alliances, but they also can happen across alliances. There is very, very close cooperation. And I think basically, There are big, big games, commercial games being played across the globe. That's quite clear.

Peter Harbison:Mm-hmm.

Rafał Milczarski:I think aviation across the globe is growing dramatically, and it will grow even further. This landscape is going to be changing. I think the alliances were a very important factor or a stage in the development. I don't think they're going to be as relevant as in the past. But actually, I think it's, you know, the Star Alliance is a very, you know, we do have cooperation with lots of, you know, culture cooperation with lots of members of the Star Alliance. We enjoy this cooperation. This is why we can offer a better service, you know, more connectivity for the customers who are our customers. And I think by and large it's good. And I would say—

Peter Harbison:How much traffic do you get from the Alliance?

Rafał Milczarski:I am skeptical about joint ventures. You know, because they enjoy antitrust immunity, and antitrust immunity is basically the antitrust bodies don't really look at them anymore because they enjoy the immunity. So, and it's a form of, let's say, cooperation that is— that normally would not be allowed. That normally wouldn't be allowed. So it's a very strange concept. But I think there are people who grow despite the fact that there are these joint ventures. You know, TAP Portugal is one example. They have shown that it's possible. We are another example. We are flying, you know—

Peter Harbison:But TAP, for example, has got some foreign investors who are quite powerful, which is helping it.

Rafał Milczarski:Well, I think TAP has good management. I think, you know, investment and money, once you run a company in a good way, You always find the money. I think the key and the beginning and end of everything is when you— how do you run a company? Do you accept various rigidities? I think we accept way too many rigidities in Europe. We should be addressing the social issues, but not in a way to make this industry less efficient, but in order to make it more efficient. We should be addressing—

Peter Harbison:I want to— yeah, I'm with you. I'd like to go back to Jiri on a point you were making before. Rafał, about the— I mean, obviously, Alitalia is in a very special position, and consolidation seems like a good idea from where you're sitting at the moment. This issue, though, that Rafał mentioned about the whole issue of national— nationality, nationalism, when it comes to a flag carrier, I mean, that's a real constraint, I guess, when it comes to the sort of partner that Alitalia might get, the sort of investor. I mean, if we're not talking about the Italian railroad, if we're talking about another airline, for example.

Jiri Marek:Yeah. Well, I would say particularly in terms of this, Italy is a particular case because it's more about the regions than Italy itself. So there is a lot of influences from many regions and many regional airports, which has ambitions to be the second Heathrow of Europe, right? So, so this is also what is driving also our difficulties in the past. And yeah, we are on the market, one of the last largest carriers which is not part part of either horizontal or vertical consolidation. A lot of things are happening. I hope you didn't believe I will give you the answer. Who is the one?

Peter Harbison:Always ask.

Jiri Marek:But yeah, I think there might be some news coming definitely soon.

Rafał Milczarski:I also—

Peter Harbison:Let me put it another way. What's the sort of ideal partner when it comes to—

Jiri Marek:I mean, the ideal part is that we need to play our role and Of course, we have to overcome the difficulties of constraints that we have, the Linate, Malpensa, and Fiumicino. It's a bit difficult where you create your hub. Also, geographically, there are not many regions where you have some advantages. For Rome, which is mostly leisure income destination, as a hub, you might consider Middle East, Africa, Latin America, but definitely you will not be the hub for Europe. That would be rather like Malpensa, will be the great position, one of the richest regions in Europe. There is a lot of difficulties. The important is that if all stakeholders will have the same vision and same strategies, then it can be achievable. If everyone will go behind different interests, then it will be relatively hard. I think that also the outcome of this, the government make it very clear. They want to have very strong national carrier because it's another point we didn't mention, that everyone in Europe believes that the airlines are the driver of the economy and driver of the development. I mean, Carsten mentioned yesterday, if the Lufthansa will not be there, the German economy will stop functioning. So, government make it very clear, they want to find the solution that we can be successful playing this role.

Peter Harbison:But there's a trade-off, isn't there, between, I mean, the overt nationalism that you've seen in the Italian government with Alitalia over the years, And the need to have a commercial partnership that really works. I mean, they're in conflict, those 2 ideas.

Jiri Marek:Yeah, but I said, mentioned in the beginning, this conflict will be always there. And that's also what you've been mentioning, that it's rather like about the vertical consolidation in Europe because no one wants to give it up, the brand. I mean, I admire what you do, that you basically integrate like the US way, that one brand is completely diminished, taken over by the other. But I can hardly imagine this will happen on a massive scale in Europe.

Peter Harbison:Yeah, I must say I'm inclined to agree. easyJet's fairly active in Italy.

Javier Gandara:Well, we have— it's public that we have put an expression of interest, and then, well, there is a process going on. There's a confidential process, and we are just waiting for the next steps on that outcome. But again, as anything we do, I will not repeat enough Anything we do in terms of M&A activity will have to be a strategic fit with what we do, which is short and medium haul within Western Europe. Second, the right commercials. And third, also operationally integrable, because then, well, Oliver just mentioned that it's not so easy to integrate another airline.

Peter Harbison:Mm-hmm.

Javier Gandara:So we have also had a tough time trying to get everything running in a few months. Since we started flying here in Berlin. But I guess talking about consolidation in general, I think we should not forget that we are in a privileged environment in this part of the world because of the regulatory framework. Because let's not forget that many of the other parts of the world are still run by things that were set in 1944 in the Chicago Convention. So as I heard a quote that I like very much, I think it was an ex- KLM CEO, that sometimes he mentioned that, doing an analogy, that if the Hollywood industry would be just regulated with a similar framework as the airline industry, they would still be doing silent movies. And that's actually true.

Peter Harbison:It's a very good parallel.

Javier Gandara:And that really just— it's a big constraint because let's not forget it also that in some cases, even within Europe, the community designation clause is It's not accepted by all the countries in the world. So in some cases, to have overflying rights into Asia, for example, you need to be owned and controlled by the nation that is originating or destination of the flight. And that also triggers some of the way that consolidation is taking place with an umbrella company and then different brands. So that's why, well, we see long-haul is complex enough, and all this framework is complex enough for them really just being focusing on the short and medium-haul.

Peter Harbison:You need a partner who can fly long-haul. I mean, another issue, and I agree entirely with that, the ownership and control rules are really a massive hindrance on, on a sensible industry. But another aspect, and this has been very powerful in the Alitalia case, is, is the role of the unions. Um, and Oliver, this is something you're familiar with too. Absolutely.

Oliver Wagner:I guess in the last 12 months we signed 14 union contracts with the different unions, be it Verdi in Germany, be it For the cockpit and cabin crews. Then for the— we have 2— VC, the Vereinigung Cockpit, which is— which represents our pilots, and we have another union for the flight attendants. So this is a very complex thing. What I think— well, it's probably not only special for Germany. It's certainly something we have to— we would have to consider either in France, for instance, or in Italy. But that is certainly one of the, one of the, one of the, one of the barriers that we have. Legislation is another one that you have towards consolidation. So I do think right now the driving forces are certainly rather going to be bankruptcies instead of, instead of M&As. So it's not going to be black or white, but The more— I think the more relevant driver is going to be bankruptcies and not M&As. And I guess I think the Air Berlin case is a very special one. It's sort of a blueprint. Why does one go bankrupt? Good customer base, lousy cost base, even worse strategy. So whenever a company, maybe a smaller company, is in a— is stuck in the middle between low cost and legacies and doesn't have these 3 preconditions in place, it's, it's, I think, and looking at the capacity constraints that we're going to see in some airports, you can only grow by bigger aircraft. You cannot grow anymore by additional aircraft, which is relevant for some of the German airports as well. So I think, yeah, we will see more, more, more bankruptcies, and it's going to be the driving That's not a very cheerful outlook, is it?

Javier Gandara:Well, it's not, but then talking about capacity constraint, and Rafał mentioned also, well, if you look at— Aer Lingus is a good example. Now in Berlin, for example, for this summer there is more capacity than it was before Aer Lingus went bust. Or in other airports like Palma de Mallorca, for example, this summer and next summer there will be more capacity than before Monarch and Aer Lingus went bust. Went, went bust. And that's partly— it's not because of irrationality, but it's a very rational move because also of capacity constraints. So there is very little additional slots. So unless you pick them, then somebody else will pick them. So there is many airports that already close to full capacity, not full capacity, and that's already just adding pressure. So only by upcaging you would be able to just be able to keep growing on all those airports. So yeah, we know it's an industry that is structurally It's not attractive as a whole. It's not covering the cost of capital. But then there are certain business models and certain airlines in particular that have been able to really go through all these difficulties and still be delivering value to our shareholders and especially to our customers.

Oliver Wagner:It's an industry of bottlenecks right now.

Peter Harbison:And as Patrick said last night, essentially you've got to be insane to be in it, which I think is pretty good. Enjoyable, I guess, if you're on the right side of insanity. Good luck with Alitalia. We hope— we wish you well. Hope that things go well. And certainly good luck with all of you. It's, it's been an interesting conversation. And I'm not sure if we've solved the issue of consolidation. I guess we've talked enough about bankruptcy to, to make it interesting anyway. Thank you, gentlemen. If you'd give them a big hand. Thank you.

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