Business - In the Downturn, Europe's Airlines Scramble to Merge

Adam Smith

Aside from bankers and automakers, few can claim as rough a ride in 2008 as those in the airline business. Eye-watering fuel prices in the first half of the year and the onset of a global slump in the second will mean a $5 billion loss for the industry this year, according to the International Air Transport Association (IATA). More than 30 carriers from Hong Kong to the U.S. have gone under in 2008. Desperate to trim costs and bolster revenues, carriers are turning to mergers to survive, and nowhere is that happening more than in Europe. "The name of the game," says Geoff van Klaveren, an airlines analyst at Exane BNP Paribas in London, "is consolidation."

This month the game is looking frenzied. On Dec. 1, Ryanair made a $1 billion takeover bid for Irish flag carrier Aer Lingus, the second such offer from Ireland's no-frills airline in as many years. The Irish carrier has rebuffed the offer, but shareholders have until Jan. 5 to decide

On Dec. 10, Virgin Atlantic said it was in talks with Germany's Lufthansa over the future of BMI, a British airline that Lufthansa is currently taking over. This year the German carrier has taken a 42% stake in Austrian Airlines, with plans to pick up the rest later, and a similar share in Brussels Airlines, which handed the Cologne-based carrier access to west Africa. British Airways has been talking to Spain's Iberia and Australian carrier Qantas about a merger.

All that activity reflects the grim prospects facing the industry next year. IATA expects the world's airlines to lose an additional $2.5 billion in 2009. Passenger traffic, it forecasts, will slide 3%, the first fall since 2001. Next year looks particularly bleak for European carriers. Having hedged more than U.S. rivals against the spiraling fuel costs earlier this year, European airlines — now locked in to fuel contracts — are less able to benefit from the steep slide in the price of oil in recent weeks. American carriers have also reacted quicker than European rivals when it comes to cutting back on capacity. So while U.S. airlines account for most of the global industry's losses this year, IATA expects them to turn a profit in 2009. Losses in Europe are forecast to rise tenfold, to $1 billion.

Not all the deals will happen, of course. Bosses at both Iberia and Qantas have warned BA that it can join forces with only one of them, and on Dec. 18, Qantas and BA said talks had come to an end after the airlines failed to agree on "key terms" of a deal. One of the problems in Europe is that few airlines — Ryanair and Lufthansa are exceptions — have enough cash on hand to simply buy smaller rivals.

Those airlines lacking resources and scale may have little choice but to yield to larger ones, analysts say. Alongside Air France-KLM — Europe's biggest airline and still a favorite to grab a minority stake in beleaguered Italian flag carrier Alitalia — and the ever growing Lufthansa, an enlarged BA and Ryanair would mean "for most of the smaller network airlines who have a very weak balance sheet, they're going to have to fold into one of those four groups," says Exane BNP Paribas' Van Klaveren. Scandinavian Airlines (SAS), for one, "will survive 2009, but I doubt it can survive 2010 on its own," he says. And while banks or carmakers can be too big to fail, "the days of every country in Europe having their own national airline are gone."