European airlines ripe for mergers

Americans pioneered no-frills airlines, but it is Europe where they are flying spectacularly high. Since deregulation in 1992 prices have tumbled, as passengers starting their summer holidays this weekend will appreciate. The cheapest ticket from Milan to Paris would have cost 16 times more in real terms 25 years ago.

Tough competition in Europe — along with higher regulatory costs — makes it harder to make money. Airline profits average $7.58 per passenger, less than half the US average. The market is fragmented, with more than 200 airlines flying. That is more than twice as many as in the US, where foreigners cannot operate domestic flights.

The economics of the US industry were transformed by mergers. The top six airlines in the US now have 90% of the market. Might the European industry, where the top six carriers have just 43% of the market, follow a similar path?

As weak airlines get clobbered by higher fuel costs, takeovers are likely. In May Ryanair boss Michael O’Leary said consolidation would make Europe look more like the US, with four or five very large airlines. British Airwaysowner IAG has been pursuing budget airline Norwegian Air Shuttle, although on Friday it stressed that talks had gone nowhere.

Consolidation is a long-term threat to cheap European fares. Shorter-term, higher-fuel prices will push up prices. Much also rests on airlines’ willingness to curb capacity growth. That is expanding at nearly 6% but it is set to slow this winter. Enjoy cheap journeys while they last. London, August 3