Europe Diversifies

At a Glance

  • The UK’s decision to leave the European Union has led to speculation across the continent regarding the future of integration, though the impact of this could take years to become manifest.
  • FSCs are enacting reforms to adapt to a new competitive landscape, as LCCs continue to blur the lines between service options.
  • Airlines continue to talk of ‘upgauging’, creating fewer flights but with larger aircraft, however in practice the trend is not so widespread.
  • We could begin to see collaboration between FSCs and LCCs through code-sharing and mutually improving connectivity, although to what extent remains unclear due to fundamental differences.

The Year of Brexit

2016 will probably be remembered as the year in which the UK voted to leave the European Union (EU), bringing to an end a decades-old trend of integration. Indeed, following June 23rd’s pro-Brexit vote, there was no shortage of public announcements given by the major airlines about what the future would now hold. Yet for all the speculation, very little is set in stone and it will take years for the consequences of Brexit to become clear, whether what happened in the UK was a one-off or if any other EU members will follow suit.

Performance Under Pressure

Despite uncertainty, Europe’s airlines have shown extraordinary resilience in the face of challenging economic times and intensifying competition – not only from, but among, the Low Cost Carriers (LCCs). Nearly every major Full Service Carrier (FSC) has enacted major structural reforms in order to adapt to the new landscape. While in percentile terms the operating margins are still much lower than those of the major LCCs, the profits posted by the major FSCs were still impressive.

Airline Financial Performance

Source: Airlines, FlightGlobal, Embraer

How do FSCs and LCCs Evolve?

As in the US, business models between FSCs and LCCs have converged to the point at which there is little difference between the two. Not long ago, it would have been almost unthinkable for FSCs to be charging for on-board meals and drinks, checked luggage, seat selection, etc. LCCs meanwhile were true to their “no frills” mantra, with few ancillary products offered to enhance one’s journey. What we think of as givens are continuously being redefined. One of the last great taboos between FSCs and LCCs may be challenged in the near future: co-operation between the two, with code-sharing feeding each-other’s networks and mutually improving connectivity.

Time to Work Together

Nearly every European FSC – even in its leaner guise – struggles to turn a profit on short-to-medium-haul networks, which is the most lucrative business for the LCCs, who in turn have struggled to open or maintain profitable long-haul networks. As markets mature and opportunities for further growth diminish, is the answer as simple as working together? Probably not: the line between friend and foe is blurring, but there remain some key fundamental differences.

Key Questions for Airlines

  1. How to guarantee commitment from a supranational LCC in feeding the network of a national FSC?
  2. How to harmonize a long-haul business product with that of an LCC on the shorter leg of the journey?
  3. Assuming FSCs would migrate to long-haul operations only, where would they source their crew?
  4. How viable are narrow-body aircraft (especially larger ones) as hub feeders?

Time to Diversify?

Larger FSCs also run the risk of bewildering their customer base with the introduction of too many products. For example, some have a full-service mainline operation, followed by a lower-cost division operating for the mainline; another more supranational dedicated LCC division, even a separate charter/leisure-focused division and a regional franchise below that. This structure is broadly true of the largest FSC Groups in Europe: IAG, Air France-KLM and Lufthansa. LCCs meanwhile are for the most part a single entity, or one brand operating under two or three Air Operator Certificates (AOCs) in order to gain access to more home markets.


Notwithstanding, the large order volumes for narrow-bodies with 150+ seats, 25% of the airliners currently in service in Europe – amounting to around 1,250 jets – are in the sub-150-seat category (TPs account for another 12%). For all the talk of ‘upgauging’, there are still some 700 sub-150-seat A320 and 737 family aircraft active in the region with around 60 airlines.

Fleet in Service by Seat Segment

Source: Ascend

E-Jets in Europe

Europe is home to 25 operators of Embraer jets and 25% of the global E-Jet fleet in service. The versatility of the E-Jet is put to full use in this region, be it feeding complex bank structures at congested airports to pioneering new markets where a narrow-body aircraft could only be deployed on a low-frequency basis – if at all. The E-Jet has neatly replaced its turboprop and out-of-production RJ predecessors, while offering the growth into a new segment in which regional aircraft did not operate in the past.

Europe's Rightsizing Solution

The E-Jet also with its right-size concept makes the perfect fit to most high-yield markets, contributing not just to the airline’s profits but to the actual returns on the asset itself. Embraer is not engaged in the market share war in Europe in which the apparent victor simply deploys more seats – usually to the detriment of yields. Embraer is also of the opinion that given the size and maturity of the European market, demand does not and will not warrant a structural shift upwards to large narrow-bodies across the board: one size simply does not fit all, and a rationalized fleet does not necessarily signify an optimized one. This is true for LCCs too, and the E195-E2 will provide an attractive proposition with much lower trip costs and comparable seat-mile costs too than its large narrow-body counterparts.

Looking Ahead

With all the changes taking place in Europe there is a lot of suspense, with high-profile elections due in 2017 and the very future of the EU under the microscope in the coming years. Against this background, the need to right-size becomes all the more imperative, towards aircraft able to weather any cycles in demand and supply. Consumer behavior, as we have already seen following Brexit, can change rapidly.

An Optimistic Outlook

Whatever the future brings, it is reassuring that in Europe most FSCs and LCCs alike are in financially much better health to face economic or geopolitical headwinds than they were prior to 2008. The migration towards fuel-efficient aircraft was clear, as was the need for capacity discipline, which has already yielded positive economic results across the North Atlantic in the USA. In this regard, right-sized aircraft, like the E-Jets, have demonstrated themselves as a fuel-efficient, lower-risk asset, boasting high liquidity and a broad acceptance among both banks and lessors.

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