The Wall Street Journal
By Stephen Wilmot
Aug. 2, 2017 9:26 a.m. ET
Tantalizing hints of airline consolidation are emerging in Europe. Sadly, none look likely to transform the industry’s profitability along U.S. lines.
Both Air Berlin, the second-largest German airline, and Alitalia, the Italian flag-carrier, are looking for new partners. Their previous backer, the Gulf-based, state-sponsored carrier Etihad, has been forced by the prolonged oil slump to rethink its strategy.
Lufthansa is the obvious buyer for Air Berlin. The German flag carrier—the largest European airline by most measures—is flush with cash and confidence, having announced record first-half operating profits on Wednesday. It has a long record of jealously defending its home turf against low-cost leaders Ryanair and easyJet , which both want to expand in Germany. And it has already taken operational control of 38 Air Berlin aircraft under a so-called wet-leasing deal cleared by antitrust regulators in January.
Management is careful not to express too much enthusiasm in public. “If the right conditions are there we’d be very interested in taking part of their business,” Chief Financial Officer Ulrik Svensson told analysts Wednesday. He stressed three sticking points: Air Berlin has too much debt; its staffing costs are too high; and a full merger of Germany’s top-two airlines couldn't escape antitrust scrutiny. Investors can conclude that discussions with unions, creditors and regulators are ongoing.
Alitalia was officially declared bankrupt in May, when staff rejected a restructuring plan. State commissioners are now running an auction process, to which Ryanair and easyJet have both submitted nonbinding bids. They are most likely interested in landing slots in Milan and Rome as well as Alitalia’s customers; no bidder will want its cost structure as is. The commissioners made clear in bidding guidelines published this week they don’t want the company to be split up.
Another hint of M&A activity came last week in the form of a complex deal that deepened pre-existing links between four of the world’s biggest airlines: Air France-KLM , Delta Air Lines , Virgin Atlantic and China Eastern Airlines . Delta and China Eastern are each buying a 10% stake in Air France, which is in turn buying a 31% stake in Virgin Atlantic from Richard Branson’s Virgin Group. The shareholdings are designed to cement closer cooperation, particularly on trans-Atlantic routes, within the confines of U.S. and European rules banning foreign majority ownership of airlines.
All these moves are helpful: They should help trim the problem of excessive supply growth that has long bedeviled European short-haul, and has lately crept into the trans-Atlantic market.
But investors can’t expect the kind of consolidation that has pushed U.S. airline margins into double digit territory—and improved their stock-market performance—over the past half decade. Competition between low-cost carriers and former state airlines in Europe is as fierce as ever, and won’t be much reduced by current M&A hopes. European airlines will remain a turbulent place to invest.
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