MIAMI – The news that Lufthansa Group has entered a bid for part of Alitalia raises the question: Just how much bigger can the German flag-carrier get?
Over the past decade or two, it has gradually swallowed Swiss and its affiliate leisure airline Edelweiss Air; Austrian Airlines; Belgium’s Brussels Airlines; set up its own low-cost carrier (LCC) subsidiary Eurowings; and this fall bid for the largest chunk of bankrupt fellow-German LCC, airberlin. The last of those also came with Austrian carrier NIKI and regional outfit GW as part of the package.
The last of these deals has to get past the European Union competition authorities, but the odds seem good for Lufthansa crossing that final hurdle.
Now, the administrators handling bids for Alitalia say that Lufthansa is one of the seven carriers that has entered a bid for the stricken Italian airline. The Frankfurt-based giant has said that it is interested in picking up parts of Alitalia’s long-haul network, as well as some of its short-haul and domestic assets, but has hinted that it will require major restructuring of Alitalia, as it attempts to succeed where Etihad failed and create a profitable future for the notoriously loss-making airline.
The details of who-gets-what from Alitalia’s carcass will not be known until next April; seven bidders have come forward, with UK-based easyJet the only other one whose identity is known.
So, how much larger can Lufthansa Group become? And has its steady expansion been part of a careful, long-term plan to dominate the European landscape, or the result of a series of opportunistic purchases?
John Strickland, director of JLS Consulting, a well-known UK airlines analyst, believes that the gradual takeover of other ‘Germanic’ airlines such as Austrian and Swiss, was logical and understandable. And, when talking about airberlin, Lufthansa’s interest has been largely defensive, not aggressive: “They saw the incursion of low-cost carriers into Germany and felt they needed to defend the German market.”
They had already set up LCC Germanwings, which became Eurowings and “had a fairly weak competitor in the shape of airberlin,” said Strickland.
“[But] they didn’t want it to fall into the hands of a stronger rival like Ryanair. I think it’s more than opportunism. If it looked like airberlin was going to continue and Etihad was able to pump money in, [Lufthansa] would have been relatively comfortable with that and would have continued to grow Eurowings. They are rolling it out into Austria, Switzerland, and Belgium, in different forms,” added Strickland.
However, “They took the view ‘It’s going to go, we had better be the ones to influence how that is going to play out,’” he said. The worst scenario for Lufthansa would have been if mega-LCC Ryanair had moved capacity into Germany in a major way – the Ireland-based carrier Ryanair is already doing so, by moving into major airports like Frankfurt where it had never previously competed.
Strickland believes Alitalia as a whole would be too much for Lufthansa to digest, but Italy is a very important market for it. If Lufthansa’s bid proposal is accepted it will have to be on the basis of a major restructuring of the Italian airline. These things always take management time and energy. And that would possibly risk stretching Lufthansa’s management resources – as happened with Etihad.
Can the growing Lufthansa Group giant be challenged by other European airline blocs? There are few major, or even mid-sized, national carriers remaining as independent entities that could be swept up into one of the three main European groupings of Lufthansa Group, International Airlines Group (IAG) and Air France-KLM.
“IAG’s acquisition strategy to date has focused more on bringing greater strength to their London Heathrow position, where they can’t grow [organically] because of the lack of slots,” said Strickland “So, they’ve bought carriers that had slots there and incorporated those.”
IAG, whose members are Aer Lingus, British Airways, and Iberia, plus Spanish LCC Vueling and new low-cost, long-haul carrier LEVEL, is focusing strongly on its transatlantic position.
READ MORE: LEVEL: IAG Announces Its New Long Haul LCC
Aer Lingus, for example, is building on that by steadily increasing its North Atlantic destinations and boosting Dublin as a transatlantic hub. The Dublin-London Heathrow route is also one of the busiest in the world, so Aer Lingus’s multiple flights every day are a useful way of bringing more capacity at slot-constrained Heathrow within IAG’s control.
LEVEL has also begun operating as a low-cost, long-haul carrier, which IAG intends to grow that from its initial inventory of just two Airbus A330-300s to around 30 aircraft in the next few years.
There’s a clear strategic direction in LEVEL’s expansion from its Barcelona base, which will aim to compete with Norwegian’s rapid build-up of its long-haul Atlantic services to secondary US airports and to the Caribbean and South America.
AF-KLM “are struggling on as they are,” said Strickland. “They were the first movers in consolidation in Europe but haven’t been able to get much further because of Air France’s financial weakness. They’ve got a strong home market, Paris specifically, but apart from a codesharing partnership in places like China, there’s not much evidence of [further progress].
However, AF-KLM is buying into Virgin Atlantic, which is important as it can link two separate joint ventures. Delta has a 49% share of the UK long-haul specialist and a joint venture, and Air France also has a JV with the U.S. major.
“If they play that shrewdly, if they are shrewd, then the position Delta has at Heathrow, combined with Virgin, could give them more leverage versus IAG,” remarked Strickland.
Whether that will be enough to be an effective competitor to the German giant remains to be seen.