When dr. Albert Plesman (1889-1953) became the first president of KLM he was building a company that was planned to be the pride and joy of the Netherlands. After him, virtually all states across the globe followed his vision – sooner or later, they have also created their national flag carriers that could be the symbol of their national identity. However, in the last years, some of these national carrier have disappeared. Some of them have been merged with or acquired by larger (multinational) airlines. This is happening all over the world. And it is now a particular challenge for Europe where multiple small national airlines are facing fearless competition in an open air transport market.
Are smaller European national airlines doomed to disappear? Will we see smaller airlines eventually consolidating into just a small number of large multinational airlines? In the opinion from Richard Anderson, the CEO of Delta Air Lines, this is exactly what will happen.
THE TREND During the 15th dr. Albert Plesman Memorial Lecture1, Mr. Anderson referred to consolidation as a natural evolution of the aviation industry. In fact, “consolidation really started when aviation started”, he said. The US has experienced over the last decades many examples of merges between airlines. This is the trend all over the world and it will continue to be the evolution of the industry because “every successful company has to grow organically and inorganically, and the inorganic growth comes from consolidation.”
The Air France-KLM-Delta joint adventure is a pioneer transatlantic cooperation, which started with the strategic alliance between KLM and Northwest Airlines back in 1993. This joint adventure resulted in a virtual transatlantic airline which is a “phenomenal generator of commerce that has contributed enormously to the Dutch society”, according to Mr. Anderson words. The benefits are not only experienced by the three companies involved but also by states economies and by the consumer. “Economies of scale, economies of scope and the huge efficiency obtained from the consolidation, ultimately advance the economy of Holland, the economy of France and the economy of the US.” This is an unique transatlantic consolidation, which maybe will be copied in the future. For Mr. Anderson, three main reason are driving this consolidation trend in the aviation industry:
- the current trend for less regulated air transport markets;
- the open-skies agreements in North America, Europe and most Asian countries;
- and the need for consolidation in a highly capital intensive business based upon the strength and scope of the network.
“The consolidation within countries is just about done. Even the Chinese have consolidated their airlines – China has very rapidly converged into 3 carriers.” The US has consolidated its aviation industry in the last decades, with the disappearance of some iconic airlines and the merge of multiple airlines into 3 major global airlines. This is the so called ‘horizontal consolidation’, happening between airline companies of the same country. In the future, the aviation industry consolidation will mainly happen via cross-border merges.
EUROPEAN CONSOLIDATION The consolidation in the European aviation industry is already taking place – “under the hospices of the EU, [we] have really got to the point where there are 3 major network systems”, observed Mr. Anderson. But there are still many smaller national airlines, like SAS (Scandinavian Airlines), Czech Airlines, Aegean Airlines (Greece), Alitalia or TAP-Portugal, that will inevitable struggle to compete in a global open market. “Ultimately, those carriers will consolidate and [we] are going really just have three large global networks in Europe, just like we have three large global network carriers in the US and three large global network carriers in China”. The major challenge in the European context is the fact that this consolidation process needs to take place via cross-border merges. Thus, the consolidation in Europe will not be as natural as it was in the US or as fast as it happened in China. European national flag carriers are still seen by the states as ‘national assets’. In addition, as highlighted by Mr. Anderson, the set of bilateral air service agreements negotiated by the governments of these states are considered to be valuable assets that the states do not want to lose when their national flag carrier merges with a foreign airline company.
GAME OF THRONES Recent developments might throw doubt on if the result will really be the three big consolidated european airlines, suggested by Mr. Anderson. In fact, there is little to believe that the consolidation in Europe will only happen between European airlines. The major network airlines from Asia, Middle East and South America have their eyes on Europe, they are looking for strong bases and a good access to the European market. This was what happened during the recapitalization of Alitalia, in which Etihad Airways took a 49 per cent shareholding (the limit defined by the EC for non-european stakeholders), and this is most likely what will happen with TAP-Portugal, which will be privatized this year and most of the current interested players come from South America. The next years will be interesting to clarify some of these market changes in the European aviation industry. Still, regardless of what will happen in the coming years, the consolidation in the European aviation industry is still a challenge and the game of thrones will most likely be played at the level of the three global airline alliances – i.e., SkyTeam (with Air France-KLM-Delta), Star Alliance (with Lufthansa and United Airlines) and OneWorld (with British Airways and American Airlines).
1 Dr. Albert Plesman (1889-1953) was a Dutch pioneer in aviation. He was the first president of KLM and one of the founding members of International Air Transport Association (IATA). With his vision, dr. Plesman steered the development of aviation industry world-wide. To remember the contribution of dr. Plesman, KLM and TU Delft organized the 15th memorial lecture, on January 15 at the Science Center in Delft. The event had the presence of Secretary Wilma Mansfield (Infrastructure and Environment), Mayor Bas Verkerk (of Delft), KLM Director Peter Elbers, Air France – KLM CEO Alexandre de Juniac, TU Delft Executive Board Chairman Dirk Jan van den Berg, the Dean of the Faculty of Aerospace Engineering Hester Bijl and, of course, the keynote speaker Richard Anderson CEO of Delta Air Lines. At the end of the evening Mr. Anderson handed out a cheque worth 10,000 euros to the University Fund of TU Delft. With grants, scholarships and prizes the University Fund motivates and supports talent among students, associations, teachers, PhD’s and alumni.