Turbulences in German and European Air Traffic

The insolvency of Air Berlin has stoked fears of dominance of the Lufthansa group in Germany, the second-largest air traffic market in Europe. Consumer protection agencies predicted significant fare increases, and took it as proof that, at the beginning of November – just days after Air Berlin ceased operation – the spot fares on some German domestic flights rose by up to 30%.

An analysis by PROLOGIS STRATEGY provides a much more differentiated picture (Since the news of last week about the failed takeover of Lufthansa did come in after the copy deadline, this analysis is based on the assumption that Niki would be integrated into Eurowings).

Intercontinental routes from and to Germany have seen only marginal capacity shifts. When they ceased their long-haul operation without substitution in October, Air Berlin had a seat share of only 6% in that segment. Lufthansa/Eurowings announced they would be inaugurating their own flights between Düsseldorf and Miami/New York, as well as Berlin and New York, while Condor opened up routes from Dusseldorf to the Caribbean. Accordingly, Air Berlin’s stake is equally shared between Lufthansa (+3% to 43%) and other airlines (+3% to 53%).

Merging parts of Air Berlin’s European capacity into Lufthansa/Eurowings and EasyJet has slightly increased their overall market positions: Lufthansa/Eurowings have gained 5%pts (total capacity share: 39%), while EasyJet’s share has increased by 2%pts (total: 7%).

The highest impact will occur on the German domestic market. Air Berlin’s former 24% will be split between Lufthansa/Eurowings (growing from 73% to 83%) and EasyJet (14%) as newcomer in the domestic market.

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These figures mask that the domestic traffic is traditionally determined by routes without competition. In the past, 48 of the 63 domestic city pairs were offered by just one airline, as they lacked sufficient demand for a second provider. Following Air Berlin’s withdrawal, this number has now risen to 52, with loss of competition on the routes Munich-Cologne, Munich-Hamburg, Dusseldorf-Hamburg and Nuremberg-Berlin.

Still, one must not automatically expect higher prices, as a look at the number of competitors reveals a significant development that goes along with these changes: to date, only 20% of the seats were offered by low-fare carriers, but this share has now grown to 42%. We expect that this will be a crucial structural change that will significantly raise the price sensitivity of customers in this formerly high-price market (which it was despite the competition between Lufthansa and Air Berlin).

Another view illustrates that there is no homogenous situation any more. In Dusseldorf, the Lufthansa group will initially achieve a capacity share of 46% on European cross-border flights (formerly 30% and Air Berlin 22%) and 84% in the domestic market (formerly 58% and 84%). Berlin, however, is witnessing the rise of a non-German carrier to the position of market leader. EasyJet is growing their strong position in Berlin from 14% to 36%, and in future, the British carrier will hold the strongest position not just in Schoenefeld, but also at Tegel airport. In many European cities, it is common that Paneuropean airlines such as EasyJet, Ryanair, Wizzair or Norwegian are the major provider – in Germany, this is the first time that a primary market is not dominated by a German carrier. On the other hand, the Lufthansa group, even including Swiss, Austrian and Brussels Airways, holds a share of just 25%.

We are sure that this will not be the final picture, as the race has just started. The cancellation of numerous Air Berlin flights has released attractive slots at congested airports. Ryanair has just applied for slots in Tegel. After entering Germany’s largest airport, Frankfurt, this step shows the airline’s decisiveness to extend their position in Germany. EasyJet has temporarily leased in aircrafts from other parties like Condor, to accelerate their growth in Berlin and stopping other parties from filling the temporary gap.

So, if the outlook hardly supports expectations of fare increases, why are tickets on some routes so expensive – does this not indicate that monopolist behavior by Lufthansa is most likely?

Actually, high prices on selected routes do not reflect any rise in Lufthansa’s or other airlines’ fare tables. They are simply a consequence of the regular steering principles that every European airline uses: As long as the expected load factor is insufficient, airlines extend the number of tickets available at low prices. If load factors rise, the availability of cheap tickets is reduced; the lowest prices might not even be offered at all. This process is mostly executed automatically.

After Air Berlin ceased the operation, the available capacity on several routes ran short immediately. In November 2017, the overall capacity on German domestic flights was 15% below that of the previous year. Accordingly, the availability of lower fares was substantially reduced and caused a price increase for available fares.

The existing shortage will gradually be reduced: EasyJet’s temporary lease-in will close a substantial gap as of January, and at the same time, Lufthansa/Eurowings will start offering additional flights. It is to be expected that capacity will be at the previous year’s level until the end of March 2018. Considering this correction and the structural change by the increased presence of Low Fare Carriers, the average prices on most former Air Berlin routes will return to familiar levels – or even be lower than before.

The development in Germany proves two major trends that determine air traffic in Europe and even worldwide:

  • Market concentration
  • Low fare carriers growing their shares beyond 50%

After a long period of consolidation, the US market today is determined by just five airlines, holding a joint market share of 87%. Despite last decade’s consolidations, Europe is still far away from this rate: the five largest airlines / airline groups jointly hold 64% (69% after the distribution of former Air Berlin capacity). It might be questioned if Europe will ever reach a structure like the US, but the concentration process in Europe will continue.

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Definitely unlike the US market, the European air traffic market is increasingly determined by low-fare offerings. This segment is not just driven by the strong organic growth of carriers like Ryanair, EasyJet, Wizzair and Norwegian, but more and more by LCC subsidiaries of the “big three” airline groups, Lufthansa, IAG and KLM-Air France: While the capacity of the traditionally well-known brands, Lufthansa, Air France, British Airways, Iberia and KLM, is stagnant at best, today’s growth is happening at airlines such as Eurowings, Vueling or Transavia.

Between 2012 and 2017, LCCs increased their capacity by 42% and increased their capacity share to 48%. Very shortly, more than every second airline seat within Europe will be a low-fare seat.

This development goes along with a strong hybridization of LCCs. Today, not even Ryanair or EasyJet stick to the initial, strictly low-cost approach. Some years ago, their expansion was in danger, as the purely price-driven market stimulation became more and more insufficient for sustainable and solid future growth.

Accordingly, their business models were adapted in order to attract a broader scope of market segments:

  • Instead of exclusively serving secondary/tertiary airports, primary airports were added to the network and– depending on slot availabilities – often saw strong growth
  • Simple forms of flight connections and partnerships with other airlines were established
  • Products for business travelers were introduced
  • Cooperation with tour operators has become an important segment for most LCCs, starting with simple approaches that have in part been developed further
  • Norwegian started long-haul operations
  • Niche LCCs such as Wow established hubbing between Europe and North America

The traditionally vital air traffic industry is again undergoing a strong structural change. Airlines are under the highest pressure to cope with low and further decreasing fares. While, in the US, airlines achieved this ability to cope by concentration / economies of scale, the European approach currently combines concentration with a strong adaption of business models.

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