Geopolitics defines much of Europe’s uncertain outlook in 2017

Published January 2017 in Airline Leader: Issue 38

Europe faces a growing range of geopolitical risks and uncertainties. These range from the presidential election in France and the federal elections in Germany to the UK’s (only) likely triggering of the formal process of leaving the European Union.

Political instability in Italy and a general feeling of a move to populist politics raise a tendency towards protectionism and resistance to some of the core principles of the European Union.

They also include possible shifts in Russia’s relationship with the west under a Trump administration in the US. Indeed, Mr Trump’s presidency also raises questions over Europe’s own relationship with the US, notably his attitude towards free trade and to NATO.

The threat of terrorist activity remains real in Western Europe, where both Belgium and France were targeted in 2016. Turkey also suffered from frequent terrorist outrages and an attempted coup in 2016.

The civil war in Syria and an unstable political backdrop in other parts of the Middle East and North Africa have drawn in a number of European nations to a greater or lesser extent and contributed to an influx of refugees across Europe. The refugee crisis has fuelled wider concerns about immigration, adding to a climate of political anxiety.

Within Europe’s airline industry, lower fuel prices have provided a breathing space for the less efficient legacy airlines, but independent LCCs, long and short haul have meanwhile taken renewed strides to dominate across the market. Lufthansa and, in particular, Air France are serious laggards and enter 2017 under a dark cloud.

The International Monetary Fund’s most recent GDP forecasts, published in Oct-2016, anticipate that economic growth in the European Union will slow to 1.7% in 2017, after 1.9% in 2016 and 2.3% in 2015.

The IMF expects faster growth in emerging Europe (primarily the central and eastern parts of the continent) than for the EU. GDP in this developing region is forecast to grow by 3.1% in 2017, after 3.3% growth in 2016 and 3.6% in 2015.

The forecast growth rates for the EU are noticeably slower than the IMF’s world GDP growth, forecast to accelerate to 3.4% in 2017, after 3.1% in 2016 and 2015. However, emerging Europe’s growth, although faster than the EU’s, will fall to be slower than world GDP in 2017, according to the IMF.

The IMF’s Oct-2016 report highlighted the “precarious nature of the recovery eight years after the global financial crisis”. It also warned that “persistent stagnation, particularly in advanced economies, could further fuel populist calls for restrictions on trade and immigration”.

The profit margin cycle for European airlines may have been nearing a cyclical peak in 2016. Against a broader global backdrop of airline industry operating margins reaching higher levels than any previous peak since the 1960s, there were signs of a stalling of momentum from some of Europe’s leading airline groups.

Europe’s big three legacy airline groups – Lufthansa, Air France-KLM and IAG – individually and collectively achieved a year on year increase in their 9M2016 operating margin. However, in aggregate, their margin dropped in 3Q2016, which is the most important quarter of the year.

At the time of writing, in Dec-2016, they looked to be on course for improved operating margins for FY2016, reaching a combined big three margin higher than the previous cyclical peak of 6.3% reached in 2007.

However, there is uncertainty as to whether or not this can be repeated in 2017. Unit revenues remain under pressure in the winter season as capacity growth accelerates in European markets.

Slowing GDP growth, as forecast by the IMF, gives further cause to be cautious on the outlook. This sense of caution was compounded by the performance of Europe’s five leading LCCs.

In aggregate, they also suffered a fall in operating profit margin in 3Q2016. Although Ryanair, Norwegian and Wizz Air improved their margin in the quarter, easyJet’s drop in margin was heavy enough to bring down the collective result and Pegasus’ margin also declined.

Nevertheless, the LCC five remained collectively far more profitable than the legacy three in 2016 and this superiority should continue in 2017. For 9M2016, the LCCs’ combined operating margin of 17.3% compared favourably with the collective 7.4% achieved by the three big legacy groups.

For 3Q2016, the contrast was even greater: the LCC margin of 32.7% was nearly 20ppts above the legacies’ 13.4%.

Europe’s two most profitable airlines, ultra-LCCs Ryanair and Wizz Air, look set to increase their margin lead. Even easyJet, which had a bad 2016 by its standards, achieved a higher margin for calendar 9M2016 than the most profitable of the big three legacy groups, which was IAG.

The divergence of results in the European sector suggest that not all airlines are following the same cycle. Even in a downturn, or perhaps especially so, the high margin ultra-LCCs Ryanair and Wizz Air are well placed to be among the haves.

IATA traffic data by region for 10M2016 showed that Europe’s airlines were growing more slowly than the global market. Year to date RPK growth was 3.8% for Europe, compared with 6.0% for world airlines by Oct-2016. For Europe, this almost matched ASK growth of 3.9%, so that passenger load factor almost remained stable at 82.3% (down 0.1ppts), higher than the world average of 80.5%, in 10M2016.

Aggregate operating margins for Europe’s five principal listed LCCs and big three legacy airline groups 3Q2016* and 9M2016*

In Dec-2016, IATA forecast that RPK growth for Europe would slow to 3.8% in 2016 from 6.0% in 2015, picking up only to 4.0% in 2017. The slowing of GDP growth in Europe forecast by the IMF for 2017 suggests that traffic growth in 2017 may be slower than in 2016, given the historic link between GDP growth and RPK growth.

In spite of a slowing traffic growth trend, OAG data for seat numbers in Europe indicate that there was an acceleration of capacity growth in 2016 relative to 2015 and that there is also accelerating capacity growth in the winter 2016/2017 season.

The summer 2016 season produced seat growth of 6% to/from/within Europe, matching the rate of growth in summer 2015, but higher than the 10 year average rate of 4% and higher than any other summer since a 6% increase in 2010.

According to data filed with OAG and extracted in the final week of Oct-2016, Europe will also experience accelerating capacity growth in the winter 2016/2017 season.

Total seat growth in Europe is set to reach 7% in winter, compared with 6% growth in winter 2015/2016. This is higher than the 10 year average rate for winter of 3% and the highest winter growth since 2007/2008, when it reached 8%.

Growth is being led by low cost carriers. In aggregate, LCCs to/from/within Europe are growing seat capacity at 12% in winter 2016/2017, similar to their 11% increase in summer 2016. They account for 34% of total seats, up from 33% last winter.

The relative strength of growth in Central and Eastern Europe (CEE) compared with Western Europe seems set to continue. According to OAG data, seat growth to Eastern/Central Europe, at 15%, will outpace that of Western Europe, at 6%.

Air traffic growth in CEE typically benefits from faster economic growth and from a lower level of airline trips per head of population. Moreover, traffic growth in CEE is stimulated by the presence of the region’s two leading airlines, Wizz Air and Ryanair, both of which are ultra-LCCs and offer among the lowest fares in Europe.

According to the OAG data, all but four of the top 20 airline groups in Europe are growing seat capacity year on year this winter, with seven growing at rates of 10% or more in winter 2016/2017. In order of their growth rate, these seven are Flybe (growth of 19%), Wizz Air (+19%), TAP Portugal (+17%), Norwegian (+13%), Aeroflot (+12%), Ryanair (+12%) and Emirates (+10%), which is the only top 20 player that is not based in Europe.

Other groups in the top 20 that are growing faster than the 10 year average winter growth rate of 3% this winter are easyJet (+8%), Lufthansa Group (+5%), Finnair (+5%), IAG (+4%), Air France-KLM (+4%) and SAS (+4%).

Europe to all regions: Top 20 airline groups by share of scheduled seats winter 2016/2017 and their seat growth versus winter 2015/2016

Lufthansa Group’s growth is driven by double digit increases in seat numbers by its LCC Eurowings (+14%) and by SWISS and Austrian, while Lufthansa itself is cutting capacity by 3% (note that Lufthansa Group data exclude Brussels Airlines).

For Air France-KLM, Air France is lowering its capacity modestly, KLM is growing at around 5%, while LCC subsidiary Transavia is growing seat numbers by 35% in winter 2016/2017. IAG’s growth is also mainly driven by its LCC subsidiary, Vueling, which is growing by 14%, while British Airways is growing by less than 1% and Iberia by 3% this winter.

There are five among the top 20 with winter capacity that is either flat or falling. Turkish Airlines (seats down by 2%) and Pegasus (flat capacity) are responding to a slump in demand in Turkey.

Air Berlin Group is keeping its seat numbers just below last winter’s level as it embarks on its latest restructuring. Its fellow Etihad investment Alitalia is also holding capacity virtually flat. Aegean Group is cutting seat numbers by 2% this winter, while switching significant capacity from Aegean Airlines to Olympic Air.

There can be little doubt that the acceleration of growth in 2016 and into the first months of 2017 (the winter season) has been stimulated by falling fuel prices, the impact of which has been partly delayed by fuel hedging. It is too early for a definitive view of the capacity outlook into all of 2017.

However, as fuel hedges unwind and oil prices rise, there may be a tightening of seat capacity growth during the course of the year, most probably led by the legacy airlines.

The 7% growth in seat numbers to/from/within Europe planned in winter 2016/2017 is not uniformly distributed by region. The fastest seat growth this winter will be on Middle East routes, up by 10% , only slightly below the 10 year average of 11% p/a (according to data filed with OAG and extracted in the final week of Oct-2016).

Led by Emirates, which has 26% of seats, Europe-Middle East is the only route region from Europe where most of the leading airline groups are not occupied by European competitors. Ranked second is Qatar Airways, with 12% of seats, followed by Turkish Airlines (the biggest European airline group in this market), with 9%, and Etihad, with 6%.

This demonstrates the continued importance of the four global super connectors in this market, although their year on year growth rates are slowing this winter relative to their summer 2016 growth.

Emirates’ winter growth will by 9%, after 17% in the summer; Qatar Airways will grow by 9% this winter, after 17% in the summer; Turkish is to cut seat numbers by 2% this winter, after growth of 16% in the summer; and Etihad is to maintain flat capacity on Europe-Middle East this winter, as it did in summer 2016.

In every other region from Europe, winter 2016/2017 seat growth is both faster than last winter and above its 10 year average. Intra-Europe seat growth will be 7% (up from 6% growth last winter), driven by LCC seat growth of 12%, while growth will be 4% in aggregate for airlines following other business models.

On routes between Europe and North America, seat growth in winter 2016/2017 will be 6% (a fractional increase in last winter’s rate and the highest growth since 2010/2011). Immunised JVs within the three global alliances account for 71% of seats between the two continents in winter 2016/2017, although the alliance JV share is down 3ppt from 74% in winter 2015/2016.

The total in immunised JVs on the North Atlantic is 76% of seats including the capacity of Virgin Atlantic, which has a JV with Delta. This is down from 80% last winter, since capacity in the JVs will grow by less than 1%, slower than market growth.

The Atlantic++ JV within Star is growing capacity by 5% this winter, driven mainly by Air Canada (increase of 15%), but also by Lufthansa and SWISS, but the other two alliances are reducing capacity this winter. In oneworld, the 1% capacity reduction in the North Atlantic JV is mainly due to American Airlines, while SkyTeam’s JV will have 1% less capacity as a result of cuts from Delta and Alitalia. Virgin Atlantic will reduce its seat numbers on the North Atlantic by 6%.

Growth in scheduled airline seats from Europe to region indicated winter 2016/2017 versus winter 2015/2016 and compound annual average 2006/2007 to 2016/2017

By contrast with the slow growth of the immunised JVs, the seat capacity of other competitors on the North Atlantic will grow by 30% this winter, according to the OAG data. There will be double digit growth (or higher) from Norwegian, SAS, Icelandair, Air Berlin Group, WOW Air, TAP Portugal and LOT Polish.

LCCs are increasing North Atlantic seat numbers by 147% in aggregate this winter. In addition to those already mentioned, Eurowings and WestJet are new entrants this winter relative to last winter (although they both operated in the summer).

The immunised alliances continue to dominate on the North Atlantic, but these data clearly demonstrate that the emergence of alternative business models is providing increased competition.

Seat growth from Europe to Asia will accelerate to 5% in winter 2016/2017 (compared with flat capacity last winter and growth of less than 2% in summer 2016). With the exception of Aeroflot, the leading European groups are growing at cautious rates this winter on Europe-Asia. Aeroflot Group is increasing seat numbers to Asia by 19%.

Seat numbers between Europe and Latin America will grow by 7% this winter (versus 6% in winter 2015/2016). This market is dominated by European groups, which occupy the first six places by seat numbers in winter 2016/2017: Air France-KLM (21% of seats), IAG (16%), TUI Group (8%), Lufthansa Group (6%), Thomas Cook Group (6%) and Air Europa (6%).

The highest placed Latin American group is LATAM, which is seventh this winter with 6% of seats, fractionally ahead of TAP Portugal (5%). Although the top five are growing at fairly slow rates, there is strong growth from Air Europa, Air Caraibes, Avianca, Alitalia, Aeromexico, XL Airways, Aeroflot and Evelop Airlines.

Seat numbers to Africa are returning to growth in winter 2016/2017, with an increase of 6%, after a 3% cut last winter and a 9% cut in summer 2016. Capacity cuts were focused on North Africa, as a result of terrorist events, particularly in Egypt. Thomas Cook Group and easyJet are still planning capacity cuts to Africa, mainly reflecting holiday destinations in Egypt.

Europe: top 10 airline groups by aircraft orders for week starting 19-Dec-2016

Europe: top 10 airlines by aircraft deliveriesdue in 2017

According to the CAPA Fleet Database, Europe’s airlines had a total of 2,290 aircraft on order as at 30-Nov-2016. This was a little more than the 2,230 on order for North American airlines, but less than half of Asia Pacific’s 4,657 aircraft orders. The Middle East’s order book of 1,349 aircraft ranked it as the fourth biggest region for orders, but only a little behind the 1,478 orders for the sub-region of Western Europe.

By airline group, the Lufthansa Group had the highest number of aircraft orders at 30-Nov-2016, with 258, followed closely by Norwegian, who had 257 orders. Turkish Airlines Group was third with 221 aircraft orders, followed by Ryanair with 201, IAG with 194, easyJet with 164 and Wizz Air with 140. Aeroflot Group had 102 aircraft on order, Air France-KLM 89 and the top 10 was completed by Pegasus with 76 aircraft on order.

The CAPA Fleet Database indicates that there will be 400 commercial aircraft deliveries in Europe in 2017, an increase of 7.5% from the 372 deliveries in 2016 (which was 27.4% more than the 292 in 2015). These 400 deliveries represent 5.5% of the 7,292 aircraft in Europe (as at 30-Nov-2016).

In terms of 2017 deliveries by airline, Ryanair leads the pack in Europe, with 48 aircraft expected. It is followed by eight other airlines that are due to take delivery of more than 10 aircraft in 2017: Norwegian (36), easyJet (28), SWISS (27), Lufthansa (22), (21), Wizz Air (15), Turkish (13) and Aeroflot (11).

Ryanair’s 2017 deliveries will all be narrowbodies (Boeing 737-800s), as will easyJet’s (18 A320s and 10 A320neos). Norwegian will take a mix of narrowbodies (four A320neos for its third party leasing business, six 737 MAX-8s and 18 737-800s) and widebodies (eight 787-9s).

For SWISS, its 2017 deliveries will be dominated by the Bombardier CSeries, for which it became the launch customer in 2016 with five CS100s. It expects 24 more of the family in 2017, of which 14 will be CS300s and 10 will be CS100s. SWISS will also receive three 777-300ERs in 2017.

Lufthansa’s 2017 deliveries will comprise nine A350-900s and 13 A320-200s, although the latter will mainly go to Eurowings. expects 21 new 737-800s in 2017, part of an order for 30 of the variant (five were delivered in 2015 and four more are due for 2018). This marks a departure from the UK LCC’s previous strategy of buying and operating old aircraft that are close to being fully depreciated.

Wizz Air will receive two A320-200s and 13 larger A321s as part of its strategy to increase its average number of seats per aircraft in order to reduce unit costs. Aeroflot is due to take delivery of 10 737-800s and one 777-300 in 2017, according to the CAPA Fleet Database.

Turkish Airlines’ 2017 deliveries will consist of two A321s, seven 737 MAX-9s, one A330-200F and three 777-300ERs. Turkish Airlines’ response to lower demand levels in Turkey has been to defer 165 aircraft originally due in the period 2018-2022 and to reduce its planned year end number of aircraft for every year in its 2016-2022 fleet plan.

IAG’s partnership with Qatar Airways developed further in 2016 and looks likely to grow deeper in 2017. In 2016, the Doha-based airline increased its equity stake in IAG to 20%, launched a codeshare agreement with Vueling and commenced a revenue-sharing JV agreement with British Airways. The new JV agreement does not extend to Iberia, although this might be expected as a further development at some future point.

The relationship between the two groups demonstrates a more progressive mindset on the part of IAG by comparison with Air France-KLM and the Lufthansa Groups when it comes to competition from Gulf airlines.

It may also increase tensions between IAG/Qatar Airways and some of their other oneworld partners. The BA/QR JV covers UK, continental Europe, Asia, Middle East and Africa. Other oneworld members with a significant interest in the regions covered, such as Cathay Pacific, Finnair, Malaysia Airlines or Qantas, may be looking on with misgivings – although Qantas is firmly embedded with Qatar’s Gulf neighbour, Emirates.

In addition, IAG’s increasingly cosy relationship with Qatar Airways is unlikely to sit easily with American Airlines, which has frequently joined with Delta and United Airlines in anti-Gulf rhetoric.

IAG’s Irish subsidiary Aer Lingus, acquired in 2015, is expected to join oneworld in 2017 and may also become part of the North Atlantic JV within the alliance. However, its double digit capacity growth on routes to North America contrasts with the more cautious approach of the other JV partners (in particular, American Airlines’ capacity cut this winter).

Aer Lingus’ approach to the North Atlantic market will need to be accommodated by the oneworld JV. Negotiations between IAG and American are ongoing, but have lasted longer than originally expected.

A JV between the Lufthansa Group and Singapore Airlines, first announced in Nov-2015, looks likely to start operating in early 2017. Initial coverage of the JV is expected to include Australia, Austria, Belgium, Germany, Singapore and Switzerland. With European regulatory approval already secured, Lufthansa will wait for Australia and Singapore approval before activating the first phase of the JV.

Although fairly limited in its scope, the JV should improve Lufthansa’s ability to compete with the Gulf carriers, particularly in Southeast Asia and Australasia to Germany and Switzerland. For Singapore Airlines, a JV of this scope is unusual and a clear reflection of the stress the Singaporean flag carrier is feeling from the Gulf airlines and LCCs.

While IAG has embraced a Gulf airline as a partner and Lufthansa has developed a new JV to strengthen its competitive position on routes threatened by Gulf carriers, Air France-KLM has found the going harder. Although it has limited codeshares with Etihad, this relationship has so far failed to deepen into what was once expected to be a JV.

Air France-KLM CEO Jean-Marc Janaillac, who joined the group in Jul-2016, wants to make wider use of JV style partnerships, of the type that Air France-KLM has with its SkyTeam partner Delta on the North Atlantic.

Air France-KLM does have (relatively limited) Chinese JV partners in the form of China Eastern and China Southern and these relationships do offer potential in that very significant market. For markets elsewhere in Asia Pacific, Air France-KLM has reportedly talked with Singapore Airlines about a JV, but nothing has yet materialised.

Airberlin will move forward with its latest, more radical, restructuring in 2017, splitting its operations into three. First, there will be a core network airline, with hubs in Berlin and Düsseldorf, deploying 75 aircraft, roughly half the current Air Berlin Group fleet.

Second, there are plans for a new leisure airline, combining part of airberlin’s fleet (35 aircraft) with TUIFly in a new airline to be established by TUI Group and Etihad. This is to include the Air Berlin Group’s Austrian operator NIKI. Third, 38 A320 family aircraft of airberlin’s fleet will be wet leased to the Lufthansa Group, which will mainly deploy them in its Eurowings subsidiary.

Lufthansa will complete the acquisition of Brussels Airlines at the start of 2017. Lufthansa plans to integrate Brussels Airlines into its Eurowings low cost brand.

In Dec-2016, Lufthansa confirmed the exercise of its call option to buy the remaining 55% of Brussels Airlines for EUR2.6 million under a price mechanism agreed in 2008. Lufthansa acquired its 45% stake for EUR65 million.

Brussels Airlines is smaller than the other national carriers in the Lufthansa Group in passenger terms, with a niche strength on routes to Africa.

Brussels Airlines, Lufthansa, SWISS and Austrian Airlines: passenger numbers 2008 to 2015

Uncertainty over the future of loss-making Air Malta seems set to continue. Although Alitalia signed an MoU in Apr-2016 to examine the possible acquisition of up to 49% of the government owned airline, this has not come to fruition.

The future of Sardinian-based Meridiana may become clearer in 2017. In Jul-2016, Qatar Airways agreed to buy 49% of the airline and the deal is expected to conclude in Jan-2017, subject to the fulfilment by Meridiana of various conditions.

Other changes to the traditional competitive landscape of the European airline sector that could take place in 2017 include the possible assumption by Ryanair of a feeder role to long haul airlines. In 2016, Ryanair was understood to have reached an agreement “in principle” to feed LCC Norwegian’s long haul routes from London Gatwick, but work was needed to align their booking systems.

Ryanair CEO Michael O’Leary has often said that he expects Ryanair to become a feeder for full service airlines’ long haul services at some point.

Ryanair had previously reportedly also been in talks with a number of FSC long haul operators, such as British Airways, Aer Lingus, Virgin Atlantic and TAP Portugal, about providing feeder traffic. Of these, the most likely to come to fruition is probably Aer Lingus at Dublin.

The LCC subsidiaries of Europe’s big three legacy airline groups will undergo further strategic change in 2017. At Air France-KLM’s Transavia, the priority will be growth in the French and Dutch home markets. This seems to signal the end of previous ambitions for Transavia to set up bases elsewhere in Europe and the possible closure of Transavia’s base in Munich.

For Lufthansa’s Eurowings brand, 2017 will bring a significant expansion of operations through its partnership model that envisages partner airlines joining in various ways. In addition to the integration of Brussels Airlines, Eurowings will also expand in 2017 through the wet lease of 33 A320 family aircraft from airberlin.

Vueling, was the only airline in IAG to suffer a fall in margin in 1H2016, although it still fared better than Eurowings and Transavia. Vueling’s new CEO Javier Sanchez-Prieto is leading a programme (‘Vueling NEXT’) to improve its profitability, both through revenue enhancement and cost efficiency gains.

Among other aims, this hopes to reduce Vueling’s high levels of seasonality, to raise aircraft utilisation and to improve labour productivity. During this programme, Vueling’s fleet will remain broadly flat to 2018, before resuming growth thereafter.

Europe is witnessing a slow evolution of the long haul low cost model, but examples of the genre remain limited in their number. Norwegian started its long haul operations in 2013 and Lufthansa added long haul routes to its Eurowings LCC in 2015. WOW Air commenced widebody operations in 2016.

In 2016, Air France-KLM announced plans to launch a new long haul airline at Paris CDG within the Air France side of the group. Given the project name Boost, this “will operate with lower costs”. Its launch is, at least in part, a response to new low cost competition on long haul routes to/from France by the likes of Norwegian and Groupe Dubreuil’s French Blue. Yet the fact that Mr Janaillac was constrained from even describing the new airline as “low cost” speaks volumes for the pressure this genuinely legacy carrier faces from its organised labour.

Boost modestly aims to have 10 long haul aircraft by 2020, less than 10% of Air France’s long haul fleet and less than 6% of Air France-KLM Group’s long haul fleet. This compares with Lufthansa’s target of seven widebody aircraft in its Eurowings LCC brand by 2017 (presumably before the addition of Brussels Airlines, which has nine widebodies). This represents only 5% of the total of 146 widebody aircraft in the Lufthansa Group fleet.

Both the Air France-KLM and Lufthansa Groups are really only dipping their toes in the water of low cost/lower cost long haul operations, by comparison with operators such as Norwegian. With 12 widebodies in operation at 03-Nov-2016 and a further 41 on order for delivery by 2020, Norwegian’s long haul low cost activities are significantly larger.

Transavia, Vueling, Eurowings*: short/medium haul network comparison summer 2016**

  Transavia Vueling Eurowings*
Airports 99 122 108
Countries 24 32 27
Routes*** 202 304 265
Ave. routes per airport 2.0 2.5 2.5
Ave. weekly one way freq per route 4.8 6.3 6.6
Ave trip length km (calendar 2015) 1,867 999 847

In addition to Norwegian’s established long haul routes from Scandinavia and London Gatwick, the LCC is pursuing long haul growth from Paris CDG, from where it will add Orlando as a new destination in Jul-2017 to its New York JFK, Los Angeles and Fort Lauderdale services.

Norwegian also plans to establish long haul operations from Barcelona in summer 2017, with services to Los Angeles, New York Newark, Oakland and Fort Lauderdale. It is also considering flying from Barcelona to destinations in Argentina and Chile. Gatwick to Buenos Aires is a further possibility in 2017. In addition, Norwegian has been reported to be considering long haul operations from Amsterdam Schiphol.

Norwegian is the largest LCC by seats on the North Atlantic, where its long haul capacity is largely concentrated. This is in spite of a three year wait for a US foreign carrier permit for its Irish subsidiary Norwegian Air International, which would allow it to fly both east and west with the same operating airline and with EU traffic rights in both directions. This would increase the operational flexibility and cost efficiency of its long haul operations and allow lower fares on a greater number of routes.

Iceland’s WOW Air joined the ranks of LCC operators of widebody aircraft in 2016 with the launch of routes from Reykjavik to Los Angeles and San Francisco deploying A330-300. It will add Miami to its A330 network in Apr-2017.

Already an intercontinental low cost airline with narrowbody aircraft on routes between Europe and North America, albeit via a Reykjavik connection, WOW Air has plans to expand its widebody network to as yet undisclosed destinations.

As the combination of uncertainty and LCC competition grows, 2017 looms as a defining year for the continental full service airlines. As 2016 draws to a close, the frame of union disenchantment with their employers at Air France and Lufthansa emphasises the yawning gulf between these major airlines and their international competition. Unless the equally yawning gap between management and unions at these airlines can be closed quickly, 2016’s record year of strikes could well be surpassed in 2017.

At Lufthansa, CEO Carsten Spohr is determined that Lufthansa will hold its ground in its pay dispute with pilots if it is to achieve the savings that it needs to survive – “We want to be able to grow again, within the group, and also at the core Lufthansa brand. That’s what we aim for. We want to stop shrinking and start growing again. In order to be able to do that, we need competitive structures”.

The level of intransigence and the gap between the respective positions of management and labour offers no promise of easy compromise; quite the reverse.

Air France’s new leadership has an even tougher year ahead, where even undergoing pain is unlikely to improve conditions. Significantly lagging its competitors in cost efficiency and profitability, a consistently weak government attitude has failed to support the airline’s management when tough measures were necessary.

Failure to restructure substantially in 2017 will see Air France slip further out of touch with its surrounding environment, something that will be aggravated if fuel prices rise. As IAG’s CEO Willie Walsh wryly observed, “Air France does not do the improbable and we certainly do not believe the incredible. They are not going to succeed”.

Protectionism can only achieve so much and, after being protected for so long, the hothouse plant falls increasingly further outside its sphere of viability.

Not only is this a serious danger for the French flag carrier, it also risks dragging down KLM, its close partner in the 12 year old merger that is Air France-KLM. It becomes harder and harder for KLM to continue its cost discipline while its larger partner flounders. And Air France’s inward facing strategy limits the options available to KLM as close external partnerships evolve across the world.

LCCs on Europe-North America ranked by seats for week starting 19-DEC-2016

At year end even British Airways, which has previously undertaken the heavy lifting and enjoys reasonable profitability, is encountering renewed pressure from Unite. The UK’s largest union, which covers BA’s cabin crew, has convened a strike vote for mid-Dec-2016, clearly aimed at creating uncertainty in the peak Christmas season.

And uncertainty in so many aspects promises to be Europe’s guiding force in 2017.

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