An ITA Airways plane parked at Fiumicino airport in Rome on Jan. 31, 2023.Remo Casilli/Reuters
For North American tourists, the lure of a European holiday was not just the history, the cuisine, the street life. It was also the cheap travel between countries, especially airfares. On some of the budget airlines, you could book tickets from, say, London to Venice, for the price of a pizza.
How could that be?
Deregulation that came with a lot of competition did the trick. Europe had 20 or so airlines and some of them competed on the same routes. Then came the no-frills discount carriers, notably Ryanair and easyJet, and fares and destination options improved again. Passenger numbers soared. If you could put up with tight seats and avoid the obscene junk fees, such as baggage charges, even getting dinged for printing a ticket, you could take your family on holiday without remortgaging your house.
All this is about to change – is changing – for the worse. In Europe, airline consolidation is under way and that translates into less competition and rising market share for the big incumbents. Europe may be on the verge of repeating the North American experience, where deregulation first led to lower prices then, years later, wholesale consolidation, which shredded competition and raised fares.
In the United States, an effective four-airline oligopoly was the result. The Big Four – Delta, Southwest, American and United – own almost 70 per cent of the passenger market, with each holding a 16-per-cent to 18-per-cent share, according to the United States Department of Transportation. Yes, other airlines are in the game, but they are relatively small. The share of fifth-place Alaska Airlines is just more than 6 per cent.
Europe’s competition commissioners have generally taken the view that focusing on broad choice and cheap services for the travelling public should take precedence over creating corporate giants with wings. A recent analysis by IATA, the International Air Transport Association, found that in North America, the top three carriers held 50 per cent of scheduled seat capacity. In Europe, it took the top 10 airlines to reach the same level of market concentration. No wonder European fares are cheaper than those on the other side of the Atlantic.
Too bad the European market is about to change.
Germany’s Lufthansa has agreed to buy a 41-per-cent stake in Italy’s ITA, the successor to bankrupt Alitalia, for €325-million ($467-million). IAG, the parent company of British Airways, Iberia, Vueling and Aer Lingus, has agreed to buy the 80 per cent of Spain’s Air Europa that it does not already own for €400-million. Air France-KLM, whose CEO is Canada’s Benjamin Smith, wants to take 20 per cent of struggling Scandinavian carrier SAS. Meanwhile, the Portuguese government has put national carrier TAP on the auction block, with bids expected from Europe’s biggest airline groups.
European regulators could stop each of these takeovers or tie-ups, but probably won’t.
Take ITA. While ITA’s losses narrowed a lot last year, the airline’s future is still in doubt. Its predecessor company chewed through an astounding €10-billion of Italian government support in the last 14 years of its life, to 2020, and Rome won’t tolerate putting taxpayers on the hook for any future bailouts. Lufthansa will get its prize, as long as it unloads a certain number of landing slots and routes to rivals to make the deal more palatable.
Airline bosses endlessly trot out the same arguments for snapping up rivals. They say consolidation will make the bigger airlines, and airline groups, more profitable, allowing them to renew their fleets and offer reliable, expanded service. They carefully avoid telling regulators how much they expect ticket prices to rise as competitors are eliminated.
The counter argument is that prices rise as competition falls away. Customer service and comfort often get hurt, too, as the market consolidates. The dominant airlines realize they effectively have a captive market. The prospect of U.S.-style consolidation has alarmed European travel and consumer groups.
A recent joint statement by the European Consumer Organisation, the European Passengers’ Federation and others said that the top five European airline groups are set to control more than 73 per cent of European Union passenger traffic, up from 47 per cent in 2005. “This wave of airline consolidation could drastically limit competition on thousands of connections, thus giving more leeway to market dominant players to develop and abuse their positions, at the expense of European travellers,” the group said.
The other argument against consolidation is that few airlines in Europe are struggling. The biggies doubled their collective profit last year to about €7.5-billion as revenge tourism took hold and ticket prices rose. Since prices are soaring everywhere, 2024 should be another banner year for the airline industry. The Flight Centre Travel Group this week reported that prices for Canadian domestic flights from July through September stand 14 per cent higher than they did a year ago.
The Americans seem to be taking the view – finally – that airline consolidation has gone too far. Recently, a district court in the United States blocked the planned union of JetBlue and Spirit Airlines, the budget carriers whose US$3.8-billion merger would have created the fifth-largest U.S. carrier. Europe still has healthy airline competition; it risks replicating the U.S. plunge into airline oligopoly and high prices.