Fitch Ratings-London-01 June 2018: Further consolidation is inevitable in the still crowded European airline sector both as a result of bankruptcies and through M&A, with clear consolidators emerging, Fitch Ratings says. We expect five large airline groups to dominate the future of the sector, while medium and small carriers are likely to remain under pressure.
The European airline sector remains fragmented, with over 100 airlines in operation despite recent consolidation. The top five carriers account for about 50% of intra-European seats compared to the domestic market share of almost 80% for the four largest US carriers. This highly competitive environment is further exacerbated by strong competition from low-cost and ultra-low-cost carriers, which provide over a third of seat capacity on short-haul in Europe. The sector therefore frequently faces defaults, including those of larger carriers like Air Berlin in Germany and Alitalia in Italy in the last couple of years.
We expect consolidation to continue in the European airline sector through a combination of M&A and defaults, albeit slowly. The medium-term prospects of the European airline sector are likely to be shaped by five large groups, Lufthansa, IAG, Ryanair, easyJet and Air France-KLM, provided the latter resolves its legacy issues sustainably.
For many midsize and small airlines achieving sustained profitability is likely to require operational restructuring and joining an alliance or sale to a bigger company. Failure to achieve financial sustainability may lead to bankruptcy. The increase in oil prices this year may put further pressure on costs. Midsize and regional airlines do not have an extensive long-haul network or a cost base they can rely on while competing with LCCs on short and medium haul and with other network carriers on long haul, unlike their larger peers.
The European airline sector will continue to face disruptions from development of the long-haul low-cost model, degree of consolidation and intensified competition, Brexit, or even market openness to foreign carriers' control and acquisitions in the long run. We believe an airline's cost position will remain key to its long-term sustainability. The breadth and depth of the network, including the geography of operations, are also important for network carriers. Therefore we expect companies with strong balance sheets and business profiles (eg BA, Lufthansa and Ryanair) to be well placed to cope with the rapidly changing landscape and disruptions.
We downgraded EA Partners I and II BV's notes to 'CC' with several actions following the bankruptcy of Alitalia and Air Berlin. Negative rating actions on other rated airlines are possible due to underperformance but are not a prevailing trend. We generally treat M&A as an event risk and assess a rated entity's financial and operational profile following the acquisition.
Our report "European Airlines in a Shake-Up" was published today and is available from www.fitchratings.com, or by clicking the link above.