Turbulence for Europe's State-Owned Airlines

The financial crisis means many nations can’t afford flag carriers

Governments have long helped bankroll their national airlines, buying both prestige and guaranteed service on certain routes. But in late January, two of Europe’s state-subsidized carriers—Spain’s Spanair and Hungary’s Malév—foundered as their purse strings were tightened or cut. Analysts say they won’t be the last. “Governments don’t have the financial wherewithal to support airlines in the same way as in the past,” says John Strickland, an aviation analyst at JLS Consulting in London.

Politicians are reluctant to save ailing airlines as the debt crisis forces austerity programs in other parts of their economies. So state investors in Stockholm-based SAS, Aer Lingus Group of Ireland, Portugal’s TAP, and the flag carriers of Poland and the Czech Republic have all signaled plans to cut support and seek new investors.

The timing is bad for state-supported airlines, which now find themselves left behind Europe’s three big airline groups. Air France bought KLM Royal Dutch Airlines in 2004 to form Air France-KLM Group, the region’s biggest carrier. Deutsche Lufthansa, the second biggest, has in recent years expanded through bolt-on acquisitions in neighboring Austria, Belgium, and Switzerland, and International Consolidated Airlines Group was formed a year ago via a $9 billion merger of British Airways and Iberia.

Heinrich Grossbongardt, a consultant in Hamburg who advises airlines, reckons a European slump will spark a new round of consolidation. “It’s amazing how all these zombie airlines manage to survive despite making losses year after year,” he says. “Air travel today is a commodity business, which means economies of scale are key.”

Spanair, Spain’s No. 4 carrier, stopped flying late on Jan. 27 after Qatar Airways halted talks about providing a cash infusion and the Catalonia government indicated it would no longer supply funds. Spain is cutting spending as it grapples with the euro area’s third-largest budget deficit, with Catalonia the second-most-indebted region.

On Jan. 31, Malév Chairman János Berényi announced in Budapest that the carrier is negotiating with potential buyers while contemplating an “orderly” bankruptcy in preparation for cuts in government subsidies. The European Commission in early January ordered Hungary to reclaim $390 million in “unlawful aid” it ruled was paid from 2007 to 2010 to the airline, which is 95 percent owned by the government. Although Berényi says a long-discussed investment by China’s Hainan Airlines is “not impossible,” he calls the company’s options “extremely limited.”

More change lies ahead. Ireland wants to shed its 25 percent stake in Aer Lingus to meet the €2 billion ($2.6 billion) in asset sales required by the International Monetary Fund. And Turkish Airlines on Jan. 23 said it’s in talks to buy a stake in LOT Polish Airlines from Poland’s government, which has tried to sell its 25 percent share of the carrier since 2009.


    The bottom line: Two state-subsidized airlines in Europe had financial crises in late January. With government budgets crimped, they won’t be the last.

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