We noticed you're blocking ads.

Keep supporting great journalism by turning off your ad blocker.

Questions about why you are seeing this? Contact us

Font Size

- Aa +

Sat 8 Oct 2016 12:43 AM

Font Size

- Aa +

Why Germany's airline market is overdue for consolidation

Brexit, overcapacity and stiff competition from overseas carriers are all making a dent in Germany’s aviation industry, says Ed Attwood

Why Germany's airline market is overdue for consolidation

If any country’s aviation market is ripe for consolidation, it’s Germany’s. And if German airlines need any reminder of the benefits of consolidation, they need look no further than across the Atlantic, where a range of mergers between America’s largest carriers have created the world’s most profitable aviation market.

US consumers may complain that tickets are pricier as a result, but the net result is that airlines now have the cash to start investing in upgrading their product (although whether they choose to do so is another matter entirely).

In Germany, the opposite is the case. Overcapacity means that local airlines are finding it harder and harder to turn a profit, with margins wafer thin. Local operators are also facing severe competition from abroad, with Ryanair and EasyJet offering low-cost short-haul options.

The sector as a whole is suffering as a result of the Brexit vote, a spate of terrorist attacks and consistently rising capacity. The answer must be more partnerships, tie-ups and capacity sharing, all of which explains Etihad’s move to tie up with TUI Group to launch a new leisure tourism airline, with support from Air Berlin.

For Air Berlin, a policy of being all things to all people — long haul, short haul, business, charter and so on — in such a competitive market has thus far not paid dividends. It has also not been helped by the fiasco that has been the development of Berlin Brandenburg Airport, which was set to be the airline’s new hub.

Work on the airport began in 2006, with initial completion pegged for 2011. It now looks like the $5.6bn facility may not be open in 2018 — with some observers claiming it may never open at all.

The move to create the new airline, if approved, is the second part of a process which has seen Etihad Airways Group, which owns a 29 percent stake in Air Berlin, take decisive steps to revive the latter’s fortunes. At the end of September, Air Berlin announced a major restructuring that will see it focus on more profitable long-haul routes — particularly to the US — from its two main hubs in Berlin and Dusseldorf. Included in the restructuring is a move to loan up to 40 of its aircraft to Lufthansa, which will save considerable costs. 

But Germany’s second-biggest carrier has hardly been alone in flying against considerable headwinds. Flag-carrier Lufthansa has lost an estimated half a billion dollars in two years thanks to strike action.

The TUI Group, based in Hanover, has six airlines in total and is the world’s largest leisure tourism company. Yet it is also in the process of integrating its carriers more closely, and has admitted it is seeking to cut costs wherever possible.

TUIfly, the subsidiary of TUI Group, has been the subject of takeover rumours for some time.

“We have too much capacity of our own and we are producing it well above market prices,” Henrik Homann, the airline’s chairman, wrote in a recent internal letter to airline

staff, as seen by German newspaper Handelsblatt.

“That means that flight services in Germany are often available at considerably lower prices than TUI Airlines [TUIfly] can offer.”

For all parties, therefore, the new airline makes sense. For Etihad, the new Air Berlin can now concentrate on funnelling long-haul traffic to its

hub in Abu Dhabi, and the UAE flag-carrier should also benefit from TUIfly’s long-haul customers.

For Air Berlin, the new operator is an opportunity to reduce its fleet further as it focusses on routes that make money. And for TUIfly, the cost efficiencies gained as part of outsourcing its capacity would be welcome. In addition, the assumption must be that the new airline will also benefit from the cost savings and synergies that Etihad has already introduced as part of its equity partnership strategy.

Arabian Business: why we're going behind a paywall

For all the latest transport news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Real news, real analysis and real insight have real value – especially at a time like this. Unlimited access ArabianBusiness.com can be unlocked for as little as $4.75 per month. Click here for more details.