Aviation in the US and Europe is dominated these days by large consolidated groups. The three largest airlines in the US have come together through a series of mergers and acquisitions, as have three of the four largest groups in Europe (Ryanair is the exception).
The current consolidation in Europe began with the merger of Air France and KLM in 2005. Since then, Air France-KLM has been joined by the Lufthansa Group and the International Airlines Group (IAG). This article explores each of these three groups.
Each of these has different reasons for its formation and how it has chosen to expand since. They also have differences in geographies. Lufthansa, for example, focuses on a group of neighboring countries, while IAG dominates the UK and Spanish markets. But at the core, all the airlines benefit from economies of scale, the ability to share orders and operations, and a vital boost in competing against growing low-cost carriers.
Airline consolidation
There are several reasons why airlines may join together or form a larger group. In some ways, it is the same as in other industries. Cost savings and economies of scale can improve the situation for both companies. And with shared markets and development opportunities, the combined company may expand or grow faster.
But aviation has some specific differences too. Capturing additional passengers in other markets is vital here. As is the ability to join together to order or share aircraft. And then there is the complicated and expensive issue of airport slots.
Consolidation in the US
Before considering the large European airline groups, it is worth mentioning consolidation in the United States. While this was not the first example of consolidation (Europe was doing this early as the US market was more strictly controlled), it has been rapid and significant. Part of the reason for later European consolidation has been to compete against these US giants as well.
Since the deregulation of the US market in 1978, there has been significant consolidation. Some of this has been due to failures of airlines’ weaknesses, and some has been to enhance their position. The result has been the formation of three large groups, branded now as American Airlines, Delta Air Lines, and United Airlines.
Each of these has its origins in the early days of US aviation, and part of the growth of each has been acquisition and consolidation. Names such as Pan American World Airways, TWA, Northwest Airlines, Continental, and US Airways have disappeared into these groups over the years.
In 2018, the top four airlines in the US (the three groups plus Southwest Airlines) carried 74% of all passenger traffic, according to the US Department of Transportation.
Moving to Europe
Consolidation in Europe is nothing new. There are plenty of early examples of airlines joining together. For example, Scandinavian Airlines Systems (SAS) was formed in 1951 from the consolidation of the flag carriers of Denmark, Norway, and Sweden.
And British Airways came together in 1974 from British Overseas Airways Corporation (BOAC) and British European Airways (BEA), together with smaller airlines Cambrian Airways and Northeast Airlines.
Consolidation in Europe really picked up with the formation of the Air France-KLM group in 2005. Lufthansa followed over the next five years, joining with airlines in neighboring countries. And IAG was formed in 2010 with the merger of British Airways and Iberia.
Despite the formation of these three large groups, Europe’s market remains more fragmented than in the US. Analysis in 2018, for example, showed that the four larger European airlines (Lufthansa, Air France-KLM, IAG plus Ryanair) controlled around 40% of the market. The four largest US airlines account for almost twice that share.
Another major difference is the operation of airline brands. Airlines have continued to operate under their own (often nationally aligned) brands in Europe, whilst the companies have merged at the corporate level or into a holding company structure.
Size of the European groups
When considering the largest groups in Europe, you can’t forget Ryanair. According to data from the Centre for Aviation, this was the largest airline group (and largest individual airline brand) in Europe by passenger numbers in 2019. This was the first year it beat the Lufthansa Group to top place, with a 9.5% rise to 152 million passengers.
Of the three consolidated groups, this is how they rank for 2019 passenger numbers:
- Lufthansa Group: 145 million
- IAG: 118.3 million
- Air France-KLM: 104 million
We look at each of these main groups, how and why they were formed, and how they have grown since formation.
Air France-KLM Group
Air France and KLM are two of Europe’s oldest airlines. KLM claims to be the oldest airline in the world. This is true to a certain extent. It is the oldest still operating under the same name as when It was founded in 1919. Air France was formed in 1933, itself the result of a merger of five smaller French airlines (the oldest of these started in 1918).
Merger in 2004
The two airlines came together through a merger in 2004, creating the Air France-KLM group. The French government took a 44% stake in the group, reduced since then to 14.3%.
As is usual in Europe, the two airlines have always continued to operate under separate brands. At the time of the merger, this became the largest airline group in Europe.
The merger came after both airlines had suffered difficulties in the previous years. As reported by the New York Times at the time of the merger, it offered immediate advantages for both airlines. It wrote:
“For Air France, the deal crowns a seven-year comeback from near-bankruptcy in the mid-1990s. For KLM, which has been struggling to reverse losses by imposing job cuts, a merger represents a quick injection of capital and a strong partner.”
Benefits were seen quickly. According to reports by the Financial Times, operating profits over the first year rose 21% from €405m to €489m. This came from cost reduction following the merger as well as increasing passenger traffic by nearly 9%. At the time of the merger, the group had been criticized for not planning to cut capacity – but its strategy to focus instead on joint growth worked.
Continued cooperation and benefits
Since 2004, the two airlines have continued cooperating, saving costs, and integrating in several ways. This has included:
- Significant integration of routes and connections for passengers, through either Paris or Amsterdam.
- Joint use, and development, of the same loyalty program, Flying Blue.
- Sharing of orders and aircraft. This was best evidenced with Air France taking KLMs A350 orders and Air France giving its 787 orders to KLM.
- Working together on the expansion of North American routes and joint participation in the joint venture with Delta and Virgin Atlantic.
Critically, it has helped them compete against the growing competition through the other airline groups (Lufthansa and IAG) and against growing low-cost carrier operations. There has been no further acquisition into the group, though. It looked at the acquisition of Alitalia in 2007 but ended up only taking a stake.
It was also in talks with Japan Airlines in 2009 regarding potential investment, but this was dropped as Japan Airlines instead moved to strengthen its partnership with American Airlines. And in January 2020, there were reports that Air-France KLM was considering a stake in Malaysian Airlines.
Challenges in 2019/2020
Things have not been so smooth for the group over the past two years. In 2019, the Dutch government made a sudden move to match the French government equity stake in the group. According to reporting by the BBC, the Dutch government did this to help protect economic interests and jobs. It followed a series of disagreements between KLM and the wider group.
And into 2020, it has, like most airlines, suffered due to the slowdown in aviation. Both KLM and Air France have received significant government assistance, but with conditions for how the airline must develop post-COVID. For example, the French government wants to see a reduction in domestic flights and a shift to alternative fuels. And KLM will need to offer a reduction in night flights, limit pay and dividends, and cut carbon emission by 50% by 2030.
It remains to be seen how these conditions will affect the two airlines and their group interaction. And despite the assistance, the Dutch finance minister referred to the group’s future as “not guaranteed” in an interview in September 2020.
The Lufthansa Group
The Lufthansa Group is the largest of the European airline groups (by passenger number). It is different from Air France-KLM and IAG in its company structure. It operates more like a ‘traditional’ company structure rather than a holding company (which owns assets but does not handle the commercial operation of the companies). There has been discussion though of this changing to a holding company structure. This would allow more brand flexibility but potentially would be less efficient.
Company structure
As a traditional German company, the Lufthansa Group has existed longer than the other two groups. The group really took shape from 1995, when separate companies were formed to handle other aviation services – such as Lufthansa Technik, Lufthansa Cargo, and LSG Sky Chefs. But it only acquired its first airline in 2005, after the Air France-KLM group was formed.
The company is structured into three divisions:
- Network Airlines. This handles the operation of the main ‘legacy’ airlines – Lufthansa, SWISS, Austrian Airlines, and Brussels Airlines.
- Eurowings. This is the low-cost operation.
- Aviation Services. This handles logistics, engineering, catering, and additional businesses and group functions.
Acquisition of three other airlines
Since the start of its expansion, the Lufthansa Group has focused on growing its presence and service around a core network in several countries.
Network Airlines’ has made the following acquisitions:
Swiss International Airlines. This was the first airline to join Lufthansa in the group, acquired in March 2005. This came the year after the Air France-KLM merger, and part of the reasoning was to boost competitiveness against this new large group. Swiss had also been suffering from financial problems. Its predecessor Swissair had collapsed in 2001, and pressure from other low-cost airlines had mounted.
As part of the EU’s approval conditions, both airlines had to surrender slots at Frankfurt and Zurich. Such competitiveness conditions accompanied most mergers in Europe. Speaking at the time of the Swiss merger (and reported by Deutsche Welle), EU competition commissioner Neelie Kroes explained:
“I welcome airline consolidation in Europe, but it should not lead to higher prices or reduced choice of carrier. The commitments given by Lufthansa ensure that competitors will be able to offer new services in competition with the merged company.”
Brussels Airlines. The Lufthansa Group took a 45% stake in Brussels Airlines in 2009 and acquired the remainder in January 2017.
Austrian Airlines. It was acquired in September 2009 for around 220 million euros. Again, this was a strategic move to expand the group’s regional reach and save the struggling airline. As part of the deal, the Australian government took on around a third of Austrian’s large debt, and it faced significant cost-cutting measures. The acquisition made the group the largest airline in Europe, ahead of Air France-KLM.
Adding a low-cost strategy
Investment in complementary low-cost services has been a major strategy of the Lufthansa Group. It has operated low-cost routes through Germanwings and Eurowings for some time (it took a 24.9% share of Eurowings in 2001 and increased this to 49% in 2004). Eurowings previously operated the Germanwings brand as well. The Lufthansa Group fully acquired it in 2011.
The low-cost offering enables the group to offer more services in its core regions and appeal to a more diverse customer range. The group explains this itself as:
“The differentiated portfolio of Network Airlines and Eurowings, which offers point-to-point connections, makes it possible to fully serve all relevant market segments and geographic markets with an attractive offering both for premium customers and for more price-sensitive travelers.”
International Airlines Group (IAG)
IAG is the ‘newcomer’ to European airline groups, founded only in 2011 (seven years after the Air France-KLM merger). It was formed following the merger of British Airways and Iberia. As British Airways was the larger of the two airlines at the time of the merger, it received 55% of IAG’s shares.
Merging British Airways and Iberia
It will not come as a surprise that the merger was partly a response to earlier consolidation and the growth of Air France-KLM and the Lufthansa Group. British Airways and Iberia shared fewer routes and opportunities to cooperate than the other groups’ airlines but were still both well placed to work together.
Although their customer bases are further spread, the two airlines offered new route options for each other (with Iberia much stronger in South America and British Airways in Asia, for example).
The chairman and chief executive of Iberia Antonio Vazquez said at the time of the merger:
“This is an important step in the process towards creating one of the world’s leading global airlines that will be better equipped to compete with other major airlines and participate in future industry consolidation.”
Financial pressure was also a significant consideration. Both airlines were struggling against the growing competition, and both expected to post losses in the year. Ashley Steel, global chair for transport and infrastructure at KPMG, spoke about this in an interview with the BBC:
“The merger makes huge sense for passengers and airlines alike. It will allow participating airlines to spread their cost base, something they desperately need to do.”
Adding more airlines
In terms of expansion, IAG sits somewhere between the other two groups. While British Airways and Iberia remain its main ‘full service’ airlines, it has added others.
British Midland International (BMI). IAG acquired UK airline BMI from Lufthansa in 2011, with the brand and routes incorporated into British Airways. This increased IAG’s presence at Heathrow but still came with conditions to release some slots.
Vueling. IAG moved into the low-cost space with the acquisition of Spanish low-cost airline Vueling in 2015.
Aer Lingus. IAG acquired the Irish carrier Aer Lingus in August 2015.
LEVEL. And to expand further in the low-cost market, IAG launched a new Spanish based airline, LEVEL, in 2017. This came following increased long-haul competition from airlines, including Norweigan. It has served long-haul routes in the US and South America, from Barcelona and later Paris Orly. LEVEL Europe has also operated short-haul low-cost flight from Vienna and Amsterdam bases, but this ceased operations in June 2020.
Plans for one more Spanish airline
IAG announced in November 2019 a planned €1 billion ($1.1 billion) acquisition of Spanish airline Air Europa. This has been delayed in 2020 but remains on track, according to IAG. This will give IAG a very strong position in Spain and on routes to Latin America. Air Europa is the third-largest carrier in Spain – IAG already owns the top two.
Whilst the operation of these low-cost airlines remains separate, there have many cost and strategic benefits from the larger group. One of the best examples has been IAG’s order with Boeing for 200 737 MAX aircraft. These will be split between Vueling, LEVEL, and British Airways.
Would you like to share any thoughts on Europe’s airline groups? Do you think we will see further consolidation following the events of 2020? Ryanair’s CEO predicts there will be five airline groups by 2022; what do you think? Let us know your thoughts in the comments.
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