European airlines face more cuts and consolidation – Financial Times

By Tanya Powley

More than 750,000 people woke up last Monday to discover what every holiday-maker dreads — their flights had been cancelled after the airline they were using had collapsed.

Monarch, the UK’s fifth-biggest airline, had entered administration in the early hours of the morning after the group failed to find a last-minute buyer for the business.

On the same day, the UK government kicked off Britain’s “biggest ever peacetime repatriation” as it began flying home the first of 110,000 holidaymakers stranded overseas, an operation expected to take two weeks.

But an estimated further 750,000 Monarch customers have seen their future flights cancelled.

The collapse of Monarch highlights just how cut-throat competition in the European short-haul market has become. It is the third failure of a European airline in six months. Both Air Berlin and Alitalia went into insolvency proceedings this summer, after struggling to cope with the intense competition from rival carriers.

While the European short-haul market has been extremely competitive for the past two decades, as low-cost airlines have aggressively grown their share of the market, lower fuel prices have contributed to an increase in competition in recent years.

“Some airlines have kept going longer than they would have and some have put more capacity in as a result of cheaper fuel,” says Jonathan Wober, aviation analyst at CAPA Centre for Aviation. “But there is a self-correcting mechanism here — the capacity glut leads to plummeting unit revenues, and those that don’t have the cost base to survive plummeting unit revenues eventually do suffer and disappear. You almost need that situation to cut the dead wood out.”

One of the critical problems has been the rapid consumption of market share by the low-cost airlines over the past 30 years as they have aggressively focused on cheap fares.