Consumer

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

These are the very best of times for European air passengers, but for airline investors it's hard to imagine how things could possibly be worse.

Drunk on the profit boost served up by cheap fuel, airlines have once again added far more capacity than passengers require, causing fares to plunge. A spate of terror attacks and Brexit worries have exacerbated the problem.

Cabin Pressure
European airline stocks have tumbled since the Brexit vote, with Easyjet suffering most
Source: Bloomberg

The industry needs to consolidate to avoid destroying yet more shareholder value, but Europe's airlines seem hell-bent on getting bigger. EasyJet's trading update on Thursday provided more evidence of their self-destructive tendencies.

Fares dropped 9 percent year-on-year in its fiscal fourth quarter during which the orange-hued airline expanded capacity by 6 percent. Yearly pretax profit fell by more than a quarter, the first decline since 2009. Though fares are expected to keep falling, EasyJet plans to expand capacity by another 8 percent in the 2017 financial year.

Like its rivals EasyJet's strategy seems to be this: cut fares to put bottoms on aircraft seats and wait for higher-cost rivals to blink first. But if the upheaval at lossmaking AirBerlin is anything to go by, this war of attrition looks set to be prolonged and painful for all involved

Last month, AirBerlin announced job cuts and the closure of bases in Germany. A sign of long-overdue consolidation? Forget it. AirBerlin will live to fight another day by leasing about 40 aircraft and crew to Lufthansa, whose low-cost arm Eurowings will expand faster.

Less is More
Consolidation among U.S. airlines means they are far more profitable than European rivals
Source: IATA
nb 2016 is a forecast

EasyJet should still -- just about -- emerge a winner from the current fare battle because its balance sheet is pretty strong and its costs are pretty low (though not as low as Ryanair). But sterling's slump makes that far less certain. EasyJet buys fuel in dollars so the pound's slump extinguishes much of the benefit of cheaper oil.

Meanwhile, with the cost of a ski pass increasing 20 percent in pound terms since January, it's hard to imagine so many Brits clamoring for the Alps in 2017. Analysts at Barclays estimate that the U.K. consumer accounts for half of EasyJet revenues. 

If the industry keeps seeking salvation through expansion, fares will fall further, and so will earnings and airline stocks. Lufthansa shares duly touched a four-year low on Thursday, while EasyJet's fell 5 percent, bringing its post-Brexit decline to 38 percent. 

Europe's airlines are their own worst enemies. Investors might want more circumspect friends.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net