European airlines’ tough summer adds to M&A logic
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Oliver Taslic
LONDON, Nov 11 (Reuters Breakingviews) -European airlines had a relatively damp summer. Quarterly earnings for $22 billion Ryanair RYA.I, $8 billion Deutsche Lufthansa LHAG.DE, $2 billion Air France-KLM AIRF.PA and $2 billion Wizz Air WIZZ.L generally showed robust demand but rising costs, contributing to falling bottom lines. On top of that, Chinese rivals are taking market share on legacy flag carriers’ Eastbound routes. Add it all together, and there’s a strong logic for more European M&A.
The hoped-for scorching summer failed to materialise. Ireland’s Ryanair, Europe’s largest airline by passenger numbers, saw earnings fall 6% year-on-year in the most recent quarter, with average fares tumbling 7% as the low-cost carrier cut prices to fill flights. At Lufthansa and Air France-KLM, higher wages and maintenance costs ate into operating margins. The exception was British Airways owner IAG ICAG.L, where North American flights helped boost operating profit by over 15%, sending shares up 7% on Friday.
Asia also hurt legacy players. Chinese carriers can fly over Russian airspace, giving passengers shorter and cheaper flights to destinations in the People’s Republic. British Airways and Lufthansa have cut routes to China, while the German carrier was losing as much as $550,000 on each of its Frankfurt to Beijing flights. While European carriers have urged Brussels to act by requiring all flights into Europe to avoid Russian airspace, it’s clear Westbound routes are more promising. Air France-KLM boss Ben Smith last week said his joint venture with U.S. giant Delta Air Lines DAL.N was outperforming expectations.
Boosting Atlantic routes may require similar ventures, as well as M&A. Another argument for consolidation is a massive wall of upcoming costs. The green transition promises big expenses for airlines, from purchasing newer aircraft to loading up on sustainable aviation fuel, which can cost three times as much as the conventional stuff. Carriers also face potential aviation sector tax hikes – such as the one on airline tickets currently being debated in France. Rising maintenance and fuel expenses will also bite as delays in the delivery of new aircraft keep older planes flying longer. And in 2026 Europe will phase out free carbon allowances.
The No. 1 deal target is Portugal’s state-owned TAP, which has many routes bound for the U.S. and Brazil and will begin to be privatised in 2025. Possible acquirers such as IAG, Air France and Lufthansa could get an easier ride from the previously deal-sceptic European Commission, whose new competition chief Teresa Ribera has signalled an openness to scale-building transactions. IAG, with its better operational performance and lower leverage ratio, may have an edge. Just as U.S. carriers underwent their own wave of consolidation earlier in the 2000s, so stuttering earnings, reduced global competitiveness and an onslaught of costs could accelerate the need for Europeans to bulk up.
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Airline group IAG, owner of British Airways and Iberia, reported on Nov. 8 that its third-quarter operating profit had jumped 15% year-on-year, as growth in its lucrative transatlantic routes helped it outperform rivals. IAG also announced a new share buyback programme worth 350 million euros. Shares closed up 7% on the day.
Air France-KLM reported on Nov. 7 that its operating margin fell 2.4 percentage points in the third quarter versus the same period a year earlier, as costs rose and the Olympic Games kept international tourists away from Paris, one of its key markets. For the full year, it forecast that unit costs would rise 3%, versus a 2% expectation previously. Shares closed down over 10% on the day.
Deutsche Lufthansa reported on Oct. 29 that its third-quarter operating profit had fallen 9% versus the same period a year earlier. “Delayed aircraft deliveries, punctuality issues at our hubs in Germany and regulatory disadvantages are impacting our core brand,” CEO Carsten Spohr said in a statement. Shares closed down 5% on the day.
More regional European groups Ryanair and Wizz Air also reported year-on-year declines in net income during the most recent quarter on Nov. 4 and Nov. 7, respectively. At Ryanair, average fares fell 7% as the carrier cut prices to help fill flights. At Wizz Air, earnings were affected by certain aircraft being grounded to undergo engine inspections, as well as the costs of leasing replacement planes. Low-cost rival easyJet reports results on Nov. 27.
Reuters reported on Nov. 8 citing Portugal’s infrastructure minister that the country’s government plans to resume the sale of flag carrier TAP in 2025, after receiving interest from more than a dozen potential buyers. The government has confirmed meetings with Air France-KLM, Lufthansa and IAG.
Portugal’s Prime Minister Luís Montenegro, who had previously insisted on a total privatisation of TAP, signalled a month ago that a partial sale was a possibility.
Reuters has previously reported that Lufthansa was eyeing a 19.9% stake in TAP, below the 20% threshold that would require European Commission approval. Air France-KLM was open to various options, including purchasing a minority stake, Reuters has previously reported.
North America’s net profit per passenger outshines Europe’s https://reut.rs/4fGyKkj
IAG aside, European airline shares have stuttered since May https://reut.rs/3YHliG0
Editing by Liam Proud and Streisand Neto
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