On the surface, the European airline industry doesn’t look much changed from 20 years ago: National flag carriers such as Air France, British Airways, Iberia, KLM, and Lufthansa dominate a handful of giant hub airports. Dig a bit deeper, and you’ll see that the market has shifted in a big way. Over the past decade or so, 10 legacy airlines across the region have combined into three huge groups, a consolidation that makes the market look a lot like the U.S.
But while restructuring at American Airlines, Delta Air Lines, and United Continental Holdings has led to record earnings in recent years, the Europeans remain far less profitable. Their workforces remain restive and strike-prone, they face a web of restrictions from regulators in multiple countries, and for reasons of national pride, the airlines in the big groups continue to operate as separate brands—with many of the associated costs.
Nowhere is the difficulty of changing course clearer than at Lufthansa, which in late November was able to halt a strike that grounded 4,500 flights only after management offered a bonus topping €20,000 ($21,200) per pilot and a 4.4 percent raise and dropped demands for concessions on benefits. The walkout and others over the past three years have cost it more than $500 million, and executives say there’s not a lot more they can give. “Walk with us and stop defending old-fashioned contracts,” Harry Hohmeister, the management board member responsible for the Lufthansa brand, told the pilots at a rally at Frankfurt Airport on Nov. 30. “Help us create our future.”
With annual salaries in excess of €255,000 for Lufthansa’s most senior captains, the pilots are among the industry’s best-paid. But with Delta’s pilots getting a 30 percent raise, Lufthansa’s are seeking 20 percent, and they may still reject the airline’s offer. Just as important, the pilots strongly oppose a plan to more than double the size of Lufthansa’s discount operation, Eurowings, to about 200 aircraft. They fret that the unit will hire lower-paid pilots in Austria, beyond the reach of German unions, and that management will expand it at the expense of Lufthansa jobs. “Eurowings is not your enemy,” Karl Ulrich Garnadt, the Lufthansa board member responsible for the low-cost carrier, said at the Frankfurt rally. “It is our only chance to survive the competition we face.”
A key reason for the European industry’s woes: a surfeit of players, many of them still state-backed. The EU’s top three full-service companies have a combined market share of about 29 percent, while the big three in the U.S. control 52 percent, according to researcher CAPA-Centre for Aviation. “Europe has too many airline groups for the size of the market,” says CAPA analyst Jonathan Wober.
Low-cost operators have exploited the weakness. The three biggest—Ryanair, EasyJet, and Norwegian Air Shuttle—have become serious contenders for flights in Europe, luring passengers with rock-bottom prices while charging them for expensive add-ons. No-frills carriers in 2015 had 40 percent of the European market, up from 23 percent in 2005, and Ryanair’s stock valuation almost matches that of the big three carrier groups combined. “There is no sign that pressure on European carriers will let up,” says Alex Dichter, a McKinsey consultant and former Continental Airlines pilot. “In the long run, the only two outcomes are: You win or you die.”
At the same time, the incumbents face challenges on long-haul routes. Government-backed carriers from the Middle East such as Emirates, Qatar Airways, and Etihad are routing more eastbound traffic through their desert hubs, offering white-glove service on brand-new planes. From 2008 to 2014, the three Persian Gulf carriers expanded their share of traffic from Europe to India and Southeast Asia from 22 percent to 34 percent, according to CAPA. Meanwhile, the likes of Norwegian and Iceland’s Wow Air are moving into more profitable long-haul routes with supercheap flights lacking the extras—free meals and checked bags—that traditional airlines have been reluctant to pull from transatlantic service.
Like Lufthansa, Air France-KLM has expanded its low-cost business, though even there it has a pair of brands—KLM’s Transavia and Air France’s Hop!—that date to the era when it was two separate companies. Anger at a plan to cut jobs and funnel more business to those discounters boiled over last year as workers assaulted executives, shredding their shirts before the managers climbed a fence to escape.
Only at International Consolidated Airlines Group, created in 2011 after British Airways took over Spain’s Iberia, has cost-cutting matched that of U.S. carriers. One possible reason: The company endured five strikes spanning 22 days in 2010 before winning concessions such as smaller cabin crews on long-haul flights and tying some staff bonuses to performance. In 2013 it bought Vueling, a low-cost airline based in Spain, to better compete with the likes of Ryanair and EasyJet. And last year it acquired Ireland’s Aer Lingus, adding another transatlantic hub in Dublin to relieve pressure at London’s Heathrow. Says Chief Executive Officer Willie Walsh: “We’re not afraid to say that we’re proud to be cutting costs.”
The bottom line: Like their U.S. rivals, many European airlines have merged into three giant groups, but they remain far less profitable.