Europe’s niche airlines have had a grim summer. Primera Air, VLM, Small Planet, Azur and SkyWork have all ceased operations. Expect more casualties from rising fuel prices and overcapacity unless carriers find shelter through mergers or takeovers.
Scope Ratings says fierce competition within a widely saturated European market and elevated fuel prices, made worse by a strong dollar, are squeezing profit margins given it is difficult for airlines to pass on risings costs to passengers through higher fares in these circumstances. Fuel prices are at their highest levels in dollar terms since May 2015.
For Europe’s smaller airlines, the cost pressure is more severe when they experience significant flight delays and passengers reclaim air fares under EU regulation.
The airlines which recently ceased operations had fleets of fewer than 10 aircraft, making it hard to defend market share against larger groups with greater economies of scales unless they have narrow niches or work in cooperation with bigger rivals. One option is for smaller airlines to tie up together. The recent merger plan of two regional carriers Air Nostrum and CityJet makes strategic sense, given their complementary route networks and aircraft fleets (see Scope’s commentary Air Nostrum-CityJet merger plan shows European airlines are buckling up for a bumpier ride). The alternative may be to catch the eye of Europe’s active consolidators such as IAG, Lufthansa Group or Ryanair.
Primera Air’s insolvency announced earlier this week shows that even budget carriers are vulnerable to this mix of adverse factors, with strains also appearing in the performance of market leaders such as Ryanair or Wizz Air. Growth prospects are diminishing partly because the biggest players are increasingly encroaching on each other’s markets. According to the data of OAG Aviation Worldwide Limited, even larger low-cost carriers show an overlap of more than 40% within their route networks. Primera Air’s struggle also points to certain limitations of the low-cost approach to long-haul connections, a strategy that Norwegian Air Shuttle has started to expand massively in 2018 with initial failures on certain routes. However, Norwegian has the size and capacity to balance those failures with the short-haul business of the group.
The marginalisation of smaller airlines and more consolidation appears inevitable. Scope predicted earlier this year that the European sector has entered another turbulent phase in which it might be difficult for all but the biggest players to survive (Europe’s airlines brace for more consolidation, June 2018), hence pressure on smaller carriers to bulk up or seek the embrace of larger companies.