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European airline tailwinds cloud M&A glide path

European airline tailwinds cloud M&A glide path



LONDON, March 6 (Reuters Breaking views) - Europe’s flag carrier scene is becoming less of a one-horse race. Deutsche Lufthansa (LHAG.DE)

and Air France-KLM (AIRF.PA)

 shares leapt on Thursday after strong finishes to the year, closing the gap with bigger $20 billion rival IAG (ICAG.L). Eventually, Europe’s market could slim down to a small group including these players. But the stronger German and Franco-Dutch showing suggests British Airways owner IAG won’t have things all its own way.


Lufthansa and Air France-KLM’s improved fortunes represent a reversal of most of 2024. Last year’s headwinds included the Olympic Games, which reduced the number of tourists holidaying in Air France’s crucial Paris hub, as well as strikes and aircraft delivery delays at Lufthansa. The German carrier had to fly older, less fuel-efficient planes that require more maintenance.

Thursday’s fourth-quarter results showed that things are improving. At Air France-KLM, operating profit came in at almost 400 million euros, more than double analysts’ estimates per a company-compiled consensus, helped by higher-than-expected revenue and lower fuel costs. At Lufthansa, a stronger-than-expected performance from its passenger airlines unit, and a forecast for “significantly higher” adjusted operating profit, both lifted sentiment. Shares in Lufthansa and Air France-KLM were up 8% and 20% by mid-morning.


The question is where that leaves Europe’s M&A chessboard. Many industry insiders agree that the continent’s independent carriers are ripe for consolidation. With good reason: the International Air Transport Association noted in November 2023 that in North America just three carriers held 50% of the region’s scheduled seat capacity, whereas in Europe 10 airlines held half the market. North American airlines are generally more profitable, too. The impetus for bigger, stronger groups is likely grow more pronounced as the industry tackles a wave of upcoming climate-related expenses: one study recently upgraded the long-term cost of decarbonizing European aviation by around 500 billion euros, due in part to stubbornly high prices of sustainable aviation fuel.


Key among the M&A pieces is Portugal's TAP, which has strong transatlantic links to North America and Brazil, and which the government in Lisbon wants to privatise. On the face of it, the carrier, worth perhaps $1 billion, looks a shoo-in for IAG, which has lower leverage and therefore more borrowing capacity than Air France or Lufthansa. But if Portugal decides to sell only a minority stake, that could limit IAG’s ability to raise operating margins to its current high group levels, potentially putting it off. Air France is open to various options, Reuters has reported.
In the long term, it still looks likely that European airlines will consolidate around these major groups, flanked by some of the stronger low-cost carriers such as easyJet and Ryanair. Other potential targets could include $1 billion Norwegian Air Shuttle, whose shares have fallen by around a third in the past year. With airlines generally predicting a strong 2025 as continued demand growth meets constrained capacity due to aircraft delivery and engine issues, a revitalised Big Three means a more wide-open M&A playing field.












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