Europe’s 2016 crystal ball reading

Just as we hit ‘Back to the Future Day’ in 2015 without all the film’s futuristic innovations coming true, the reality of European air transport in 2016 is likely to be a lot more mundane than people would like to predict.

As mentioned in one of my earlier blog posts, warnings of an impending European bloodbath are becoming as seasonal as putting up Christmas decorations.

Yes, we saw airline failures in 2015. Yes, that included some long standing names, like Estonian Air. Yes, more of the same seems pretty inevitable. But a few “middle seat” airline demises doesn’t constitute a bloodbath in my book.

And it’s those middle seat airlines that are set for the most change in 2016. Carriers like Air Malta; carriers who are seeking partners to give them the muscle to survive in today’s highly competitive market place.

“Your mission is to grow or die, not to survive,” former Ethiopian Airlines CEO Girma Wake said last November. “You are airline CEOs. If you don’t believe your airline will exist 10 years from today, you should go now.”

In slightly harsher terms, all airlines – no matter what their size - have to pass the “Test of Strategic Irrelevance,” i.e. if they didn’t exist, would you invent them?

Ultimately, size isn’t what makes an airline successful. What makes an airline successful is it generating more money than it spends – ideally a lot more. It’s about minimizing unit costs, while maximizing unit revenues. Any airline that fails to balance this formula will have problems. Mundane, but true.

I predict that labor will continue to be an area of tension and disruption. Nothing new there, but this is a problem which cannot be underestimated for the likes of Air France and Lufthansa which both took painful hits in 2015.

Labor tension takes other forms beyond airline strikes. Take the current French air traffic control strike. That will cost too, but will it be resolved? Will we see the Single European Sky in 2016? I’m an optimist, but not that much of an optimist. More of the same is likely.

Meanwhile, we can expect more of the same from easyJet and Ryanair. The battle for business passengers has been fought and won. Traditional airlines have undoubtedly taken the most casualties.

As the smoke rises from the battlefield, keep an eye out for the white flags of surrender. These will take the form of partnerships between Europe’s traditional airlines and its major low-cost carriers (LCCs). This is because, after nearly 20 years, there is a dawning acceptance that those LCCs ‘upstarts’ have power. The likes of easyJet and Ryanair are finally ready to engage – but only on their terms. After all, why compromise when you’re winning?

This shift in dynamics may be the key to reconciling Europe’s network disconnect. The continent has been left in limbo between unprofitable flag carrier short-haul networks, non-connecting LCCs and the need for long-haul feed. Labor resistance could be the stumbling block that maintains the status quo and forces another round of skirmishes and/or sub-optimal solutions, but I think we will see at least one of these partnerships materialize in 2016.

Further consolidation is also on the cards, although all the big players – like International Airlines Group (IAG) and Etihad - have their hands pretty full with their earlier purchases. One player sneaking in from the sidelines is China’s HNA Group, parent to Hainan Airlines.

While everyone has been focused on which airline Etihad may or may not buy next, HNA Group has quietly snapped up 23.7% of Brazilian carrier Azul, become the world’s fourth largest lessor by acquiring Bohai Leasing and pocketed (the not pocket-sized) ground handling giant Swissport. These are not small companies, and my guess is that one or more European airlines could be on its shopping list.

The anti-Gulf carrier camp will continue to voice its views, although after a while this discussion will pale into the background like the London airports debate. Perhaps that’s unfair. The London airports situation may actually be making progress. Then again, that’s been said before too.

As a knock-on effect, we’ve seen the Gulf issue further fragment Europe’s association landscape, with the creation of Airlines for Europe (A4E). I have my views on this one. I feel these airlines have divorced the vicar, rather than the problem spouse. And played into one of Europe’s single greatest weaknesses: fragmentation.

Maybe, like the traditional to low-cost tie-ups, the creation of A4E will be key to resolving the fragmentation. It might be the change which finally unifies the six or so European airline bodies. Or it could add another, albeit powerful, voice to a shouting match where nobody can listen or make themselves heard. For now, I’m going with the latter.

Sticking with topical issues, Norwegian - and its battle to set up subsidiaries to operate to the US - falls into the same political category as the airports debate and the Gulf carrier discussions. The favored decision seems to be making no decision.

Moving away from the politics and looking instead at the model itself, someone I respect made the following observation: “I am thinking that long-haul low-cost DOES have the potential to work BUT especially in the sense of hub-bypass with narrowbodies, at least on the North Atlantic.”

Maybe long-haul low-cost has the potential to tap demand in the same way as the Gulf carriers have. Stick with me. There will always be demand for cheap(er) flights. There will always be demand for more convenient flights, i.e. from the local airport, rather than traveling to a hub. And if those cheaper, more convenient flights are quicker, it’s a winning strategy for the consumer. However, this depends on the airline getting the cost/revenue equation right. Flying from a lower-cost, secondary airport is cheaper for the airline, but can they fill their flights?

The Gulf carriers have made it part of their business to offer affordable, high-quality flights from secondary cities. These feed into their hubs and onwards, so the greatest challenge for the passenger connecting over the Gulf is making the time cost stack up – which is not so much of an issue when you can’t fly direct anyway. But the option to fly direct, transatlantic from the local airport for an affordable price? That must be attractive, but is it attractive enough to enough people?

The answer is time will tell. I don’t think long-haul low-cost will move on a huge amount in 2016, but it is ticking away and gaining momentum.