The largest European airline CEOs often complain about too many carriers fighting for market share. Yet there’s little indication more industry consolidation is coming soon, at least among the continent’s larger independent legacy carriers.

All it takes is one deal to get things moving. But there’s some indication the rise of nationalism in European politics also may be influencing airlines, leading some to remain unaligned when they otherwise might be acquired by one of three major companies — Lufthansa Group, Air France-KLM, and International Airlines Group.

“The changes in [the] geopolitical landscape have led to many governments being more observant about national interests,” Finnair CEO Topi Manner said during the IATA Annual General Meeting, an annual conference of airline executives.

Finnair might not be a contender for consolidation anyway, despite its small size. Its majority owner is the Finnish government, and Finnish politicians long have made it clear they do not wish to sell the company because of national and strategic reasons.

But more countries seem to be adopting the Finnish mentality, whether or not they own an airline or share in an airline. Politicians may not care about prospective mergers of low-cost-carriers or leisure airlines, but if their country’s legacy airline has been around for five decades or more, many seem more interested in its future than they might have been several years ago.

Under ordinary circumstances, some mid-sized European flag carriers might be ripe for acquisition, a group that includes Finnair, SAS, LOT Polish Airlines, Alitalia, and TAP Air Portugal. But with governments more interested in national airlines, it’s possible some may decide to go at it alone.

“Nationalism, I wouldn’t use the phrase,” Manner said. “Protectionism is more of it. Aviation is extremely important for societies, from economical, society and environmental points of view. This is more of a force today than it was a couple of years ago.”

Will There Be Any Consolidation?

It sets up an interesting conundrum.

At industry events, executives speak about the importance of consolidation, which would give the three global European airline groups better scale and more pricing power against discounters. CEOs like Rickard Gustafson, who leads Scandinavian Airlines, talks about how the top five U.S. airlines have about 85 percent share, while Europe’s top five airline groups have about half.

“There is overcapacity,” he said.

Yet it’s not clear which, if any, flag carriers are available for Lufthansa Group, Air France-KLM and International Airlines Group.

In another era, Alitalia might have been a big prize. Yes, the airline has been struggling for years, and by traditional economic metrics, it is probably not a perfect acquisition target. But Italy is a big market, and Alitalia has a storied history, so suitors are interested in it. Lufthansa has said it might want in, so long as it would get real control.

But the Italian government is not making it easy for outsiders. The government would prefer to keep the airline in Italian hands, even if ministers understand it needs outside investors with airline experience. (Delta Air Lines remains interested in buying a piece of it, CEO Ed Bastian said Saturday.)

Fabio Lazzerini, Alitalia’s chief commercial officer, declined to discuss details about the company — its future ownership will be decided soon — but said he has also noticed more European governments moving to protect airlines. He said it makes sense for Italy to act in its interests.

“We see all these signs confirming that airlines are important for countries,” he said. “It was already in effect, but it seems to be coming on more.”

This doesn’t mean more consolidation won’t happen. But in discussions in Seoul, several European airline executives suggested larger airline groups may be more likely to absorb low-cost and leisure airlines that do not have such vibrant histories.

The Thomas Cook Group is shopping its leisure airlines, and while there could be concerns about competition, governments are unlikely to block a deal to just to protect their national interests. Similarly, newer airlines like Air Baltic, Wizz Air or Norwegian could probably be sold without alarming European politicians, even if Wizz is a vital part of Hungary’s economy.

Big airline groups also can continue to pick up the pieces of failed carriers. In Europe, airlines that go bankrupt typically go out of business, rather than restructure. Last year, six European carriers went out of business, and big airlines stepped in to buy many of their pieces.

“It’s ongoing,” SAS’ Gustafson said about consolidation. “But at the moment, it is happening through elimination rather than through mergers. At some point there might be mergers.”

Turning Point

Some European governments have been taking a more protectionist stance for several years, but several CEOs said it only recently became apparent how much this affects aviation.

The turning point, they said, likely was earlier this year when the Dutch government quietly bought a 14 percent stake in Air France-KLM. At the time, new Air France-KLM CEO Ben Smith was trying to consolidate more power in Paris, and it seemed possible well-liked KLM CEO Pieter Elbers might lose his job.

The Dutch government wanted at least as much of a say in the company as the French government, which owns 14.3 percent, so it assembled its own stake.

“It is a clear sign of this [protectionism], to my mind,” Finnair’s Manner said.

In Rome, Alitalia’s leadership also noticed, Lazzerini said. Europe’s airlines went through a long period when governments were selling off airline stakes, but the pendulum has swung back, he said. At one point, the French government was prepared to sell its own stake in Air France-KLM, but now it also appears likely to retain it.

“Airlines are important for countries for connectivity” Lazzerini said. “Of course, market forces would keep connectivity anyways. But if I speculated on some of the recent moves — like the Dutch government move — it seems there is an interest in keeping a little bit of a say in the strategic direction of the most important airline in the country to drive the evolution of the airline in line with the strategic goals of the government.”

KLM’s Elbers said he agreed. He said aviation is important to the economy in the Netherlands, noting the country’s main airport in Amsterdam handles about 70 million people each year, even though the country has just 17 million people. That type of connectivity, he said, is the reason many multinational cooperations have their European headquarters in Amsterdam.

In addition, he said, it is the third-largest employer in the country, with roughly 30,000 workers.

“It is not unique to Europe,” Elbers said. “Airlines in general play a vital role in creating the development of the country and the economic development of the country and the connectivity of the country.”

Legacy Consolidation Not Impossible

Despite the recent drama in the Netherlands and France, Elbers said the European style of consolidation can continue to work, with airlines retaining national identities and leadership when they’re owned by larger groups.

He said the system produces cost savings, as in Seoul, where Air France and KLM flights are handled by one team. He also said reports that the French and Dutch arms of his company do not get along have been overblown, saying the sides often agree and work together. Their combined revenue management operation, he said, is among the industry’s most sophisticated.

Gustafson, of SAS, the flag carrier of Norway, Denmark and Sweden, also said more legacy airline consolidation is possible. He acknowledged governments in Finland, Italy and the Netherlands seem to be taking a more protectionist approach, but said other governments view it differently. He said he doesn’t expect more governments will buy stakes in airlines.

“I noticed the investment that the Dutch government made in KLM, yes,” Gustafson said. “I have noticed that the Italian government is still fighting to keep Alitalia alive, despite the state aid rules and all of that. I know that in Finland they know that Finland is a rather small country and without a strong Finnish carrier I think they would struggle to attract that much intercontinental traffic. So yes, I do acknowledge that, but I don’t really see that is going to change the landscape or that you will see more carriers turning in state-owned carriers.”

Last year, he noted, Norway sold its shares in SAS, and Sweden has been considering doing the same. Gustafson also said his airline operates with relatively little government interference.

As for consolidation, Gustafson said more is required in Europe, but added SAS, because of its size, probably cannot be a buyer. It might be acquired by one of the big groups, but Gustafson said the decision is in the hands of the airline’s shareholders.

“It is not for me to answer,” he said. “You need to ask our main share owners. The question is for them, what they want to do.”

Photo Credit: Finnair is unlikely to participate in European airline consolidation. The government views the airline as too important to national interests. tsuna72 / Flickr