Why Europe’s Short-Haul Aviation Market Is in Flux

Flying within Europe was once a pretty expensive affair. National flag carriers enjoyed route monopolies and could charge whatever they wanted — that is, until the European Union created a single market leading to a boom in low-cost carriers.

Not only was it cheaper to travel but there were now more places to travel to. Small regional airports were eager to do deals with these new airlines, especially with the promise of hundreds of new visitors arriving on every flight.

As the likes of EasyJet and Ryanair have grown, they’ve seen off much of the competition while also putting pressure on the established legacy carriers like Lufthansa, Air France, and British Airways. But now a series of challenges is putting the whole market under pressure.

Ryanair recently reported a 24 percent fall in pretax profit. It’s still making lots of money but is feeling the pain and expects others to suffer even more over the upcoming winter season.

“I think we’re going to see more airline failures and consolidation over the next number of months. The current high fuel environment, particularly for the unhedged carriers, is going to cause significant problems,” Neil Sorahan, chief financial officer, said recently.

A number of well-known names have already gone out of business in recent years, and others like Alitalia are still struggling. No case is exactly the same, and there are usually multiple reasons why airlines collapse, but the short-haul market at the moment is proving pretty challenging.

Plenty of Europe’s biggest airlines will view this as a good thing. For years they have argued that for such a big, single market there are still too many carriers.

“Ultimately we do have too many airlines in Europe, and some further consolidation would both help the stronger carriers and also create a bit more balance in the market,” said John Grant, partner at consultancy Midas Aviation.

For their part Ryanair’s low-cost rivals EasyJet and Wizz Air seem broadly more optimistic. EasyJet still expects to hit its profit target of between $483 million (£400 million) and $531 million (£440 million), while Wizz Air said trading across the key summer period had been “encouraging.”

Not everyone is that happy though.

Lufthansa, which regularly makes annual profits in excess of $1 billion, is finding it tough in its home markets of Germany and Austria, thanks to Ryanair and EasyJet muscling in, and it’s in the middle of repositioning its own low-cost brand, Eurowings.

Ulrik Svensson, Lufthansa’s chief financial officer, said he expected the European market to remain challenging “at least until the end of the year” in contrast to the long-haul business, which is performing well.

However, it’s not just increased competition — or in Ryanair’s case a delay in receiving the new 737 Max aircraft. There are other factors that will almost certainly have a bigger part to play in the long term.

Taking the Train

Most European countries have a pretty good rail systems, many of which are being upgraded with faster, more comfortable trains. Journey times are coming down, and with on-board Wi-Fi gradually getting better, it means that business travelers can get work done at the same time.

Air France is under pressure from the country’s extensive high-speed rail network and is in the process of restructuring its regional airline Hop to try and help it compete better with trains. The airline is also bracing for the impact of a proposed new eco-tax on flights.

“Making domestic France profitable is a huge, huge effort and something that we must address,” Benjamin Smith, CEO of parent company Air France-KLM Group said on a recent earnings call.

Something similar is happening at Scandinavian airline group SAS, where CEO Rickard Gustafson noted in May a softening in demand on domestic routes in Sweden with businesses persuading their employees to use the train for journeys of less than three or four hours.

There’s another reason things are starting to change. Environmental awareness is much more prevalent than it once was, and governments across the world are slowly starting to realize that they need to act on climate change. As such, it’s difficult to justify some flights.

Sure you can fly between say Berlin and Frankfurt or London and Glasgow in about a quarter of the time it takes to travel by train, but when you factor in the extra time needed to check in at the airport, the journeys are comparable.

That’s not to say every short-haul flight within Europe is unnecessary.

“Ireland is an island, and I think will continue to be an island, and there is not many easy ways to getting off the island without flying,” said International Airlines Group CEO Willie Walsh, who counts Aer Lingus among his portfolio, of airline brands.

Walsh at least is aware of the damage air travel can do and is calling for serious investment in biofuels from the aviation industry and government.

“What we’ve got to do is recognize that there will be a need for people to continue to travel by air. We’ve got to make sure that that’s done in an as efficient a way and that we play our part to ensure that we reduce our environmental impact,” he said.

Short-haul air travel isn’t going to disappear overnight, but the industry is facing considerable challenges at the moment. The European Union ushered in an era of intense competition. More and more people were wanting to travel by plane, with carriers fighting among themselves to offer the cheapest tickets.

That’s OK when times are good, but with Brexit, a general European economic slowdown, and trade wars between the U.S. and China all in play, the future is anything but certain.