Increased consolidation in the European aviation market will likely benefit bigger players like Lufthansa Group. Will low-cost carriers be able to regain their competitive edge in this evolving landscape?
If you’re thinking of taking a trip to a German-speaking country, keep an eye on Deutsche Lufthansa AG’s share price. The more it rises, the more your flight could end up costing.
The German flag carrier’s stock has more than doubled so far this year and isn’t far off a record high. That’s due in part to buoyant travel demand and much better management of the airline. On Wednesday, it reported an 80 percent increase in free cash flow for the first nine months of the year. Net debt fell by a similar magnitude. Thanks in part to labor agreements with strike-prone crew, Lufthansa’s 8 billion euro ($9.4 billion) pension liabilities are expected to fall substantially this year.
But there’s another less edifying explanation for the stock’s sudden liftoff. In the wake of Air Berlin Plc’s collapse, investors expect Lufthansa to face less competition in its home markets, including Switzerland and Austria. Fewer rivals usually means less fare pressure on fares. Lufthansa’s yields have already started to improve. Great for investors; not necessarily for passengers.
Air Berlin’s downfall isn’t the only cause of Lufthansa’s joy, of course. Ryanair Holdings Plc’s hopes of making inroads into Germany could be held back by its labor strife. Gulf carriers such as Emirates and Etihad Airways PJSC are finding life tougher too. Even so, Lufthansa’s plan to absorb about 80 Air Berlin planes will lift its local market share, particularly on internal German routes.
There’s precedent here. The once fragmented U.S domestic aviation market is now highly concentrated after a succession of bankruptcies and mergers. Some U.S. airports are now served by one or two carriers, making it easier for airlines to boost fares and charge more for extra services like second bags. Lufthansa boss Carsten Spohr speaks admiringly of the 90 percent domestic market share controlled by a handful of U.S. airlines.
In fairness, cheap flights aren’t a birthright. The financial collapse of airlines like Air Berlin and the U.K.’s Monarch suggests they weren’t charging enough to cover costs. It’s true also that budget carriers are now free to pick up some of Air Berlin’s former slots and add more flights to German airports. However, some hubs such as Vienna, Zurich and Munich have a relative shortage of take-off slots.
Margrethe Vestager, the EU competition commissioner, is concerned about the very high market shares Lufthansa would gain on some routes. Lufthansa might help its cause by not sounding quite so allergic to competition.
When Frankfurt airport’s owner Fraport AG airport offered Ryanair incentives to set up shop there, Lufthansa threatened to shift capacity elsewhere. Spohr is also in favor of Berlin’s second airport, Tegel, closing when the new Berlin Brandenburg hub finally opens. Ryanair is lobbying to keep it open, arguing that the city needs the capacity.
For a long time, low-cost carriers looked like they might drive Lufthansa and fellow legacy airlines out of business. The shoe is shifting to the other foot.
©2017 Bloomberg L.P.
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Photo Credit: Planes stand on the tarmac during a pilots strike of German airline Lufthansa at Frankfurt airport, Germany, November 23, 2016. Lufthansa's competitive advantage seems to be growing. Ralph Orlowski / Reuters
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