EUROPE

ADAPTS

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AT A GLANCE

  • As a decision on Brexit approaches, the relevance of the UK in the European environment will drive final negotiations;
  • As the market becomes gradually more dynamic, resilience and adaptability will play a key role in the airline industry environment.

THE YEAR OF BREXIT

By the time 2019 reaches an end, it is likely that the new relationship between the United Kingdom and Europe – in whatever shape it comes in – will be in place. Even though Brexit may bring turbulence for the short-term, time will mitigate economic impacts as the region adapts to the new dynamics.

Many important questions remain unanswered; the upside is the possibility of finally putting an end to the long period of uncertainty and taking assertive action to adapt to the new structure.

ESTIMATED BREXIT IMPACT IN
UNITED KINGDOM GDP

Source: IHS Markit; NIESR Brexit Impact Report, Nov18
 

As a whole, the EU is the single largest destination market from the UK, accounting for over 50% of passengers and 60% of scheduled commercial flights. On the other hand, the United Kingdom is an important point for European travelers who wish to connect with the rest of the world. With this in mind, conjoined efforts between airlines, authorities and governments alike will be essential for maintaining connectivity in the region and ensuring long-term traffic sustainability.

ADAPTABILITY AND RESILIENCE AS HALLMARKS OF THE EUROPEAN MARKET

There have been a few good years for European airlines, thanks mainly to the windfall from low fuel prices. Consolidated airlines showed extraordinary endurance in face of the growing competition, seeking to adapt to the ever more competitive landscape. However, as industry observers still spot clouds on the horizon, the time calls for a continuous focus on adaptability, resilience and long-term strategy.

There are three main topics in the European market worth keeping an eye on over the mid to long term:

1. WHAT'S NEXT FOR LCCs?

A lot has been said about the rise of Low-Cost Carriers in the European region, and one thing is certain: they’re here to stay. However, no business model is 100% bulletproof. Some LCCs have begun to show signs that they can no longer sustain the same robust market expansion, leading to the reassessment of some received wisdom such as the single-fleet strategy.

Last year, the region’s LCCs closed more intra-regional markets than they actually opened. In fact, the mismatch between large-capacity narrow-body jets and the market demand leads airlines to open low-density markets with once to thrice weekly frequencies, which does not make the route viable. As opportunities to explore trunk routes are limited, low-density markets, explored with aircraft in the up to 150-seat segment, will become more relevant in LCC networks.

2. GULF CARRIER EXPANSION IN EUROPE

Gulf Carrier capacity in Europe grew at a 10% annual rate over the past 10 years, a pace even faster than the LCCs. The number of European airports served went from around 60 to over 100, and the ASK share of these carriers in extra-regional capacity went from 9% to 16%.

These factors combined have European carriers on the lookout for these increasingly relevant players, which usually offer high standards of service and fares only slightly above the average market price point.

On the bright side for local carriers, European skies are not completely open yet, posing some challenges for foreign operators. Gulf Carriers frequently have a hard time spreading their passengers from hubs, and are often forced to serve the demand through ineffective demand banks. Having this in mind, the key for differentiation for European airlines lies exactly in the possibility of connecting more points, since they are able to offer a much more developed regional network.

 

3. INDUSTRY CONSOLIDATION

Finally, the highly competitive environment and excess capacity has been driving consolidation in Europe. For a few years in a row we have seen troubled airlines succumbing to these challenges – especially during the winter season. This does not mean that this capacity is going to waste, but rather being redistributed among the remaining players. Consolidation solves the issue of over capacity as it tips the supply-demand balance.

However, current players who, to guarantee sustainability, need to develop a laser sharp focus on mid to long term strategy, and this means being flexible enough to face the challenges ahead.

THE ENVIRONMENT AS A PERMANENT PRIORITY

Collectively, environmental awareness has been growing amongst European citizens. This is evident in many areas: governmental policies, traveler attitudes, and even technology developments that are steering society towards cleaner energy. For airlines, the most meaningful action available, for now, lies in the adoption of fuel-efficient aircraft.

 

As state-of-the-art technologies are gradually built into the next generation of aircraft, the new platforms will show between 15-20% improvements in operational efficiency. The European airlines, as global influencers in environmental responsibility, meet all the conditions to lead the demand for new generation aircraft.

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