The Commission’s airline merger dilemma is only getting trickier

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Next week the European Commission is likely to green-light Lufthansa’s attempt to take a large stake in ITA, the troubled state-owned airline formerly known as Alitalia.

When evaluating airline mergers, the Commission faces a tricky dilemma: The industry must consolidate to survive, but the resulting larger airlines are then in a strong position to raise air fares – leaving the travelling public to pay the price.

The Lufthansa-ITA tie-up is just the latest in a string of mergers. Struggling flag carriers and start-ups have been largely consolidated into a small number of more muscular and financially secure airline groups, namely easyJet, Ryanair, IAG, Lufthansa, and Air France-KLM.

The airline business can be a fragile one. Every aircraft seat offers the risk of losing money – unsold seats still need to be flown to their scheduled destination, often at great cost.

Disruption is particularly costly – and aviation has gone through no shortage of crisis, from the obvious, like COVID, to the more bizarre, like the eruption of Icelandic volcano Eyjafjallajökull that grounded flights across Europe in 2010.

As the tired old industry joke goes, the best way to become a millionaire is to start as a billionaire, and invest in an airline.

Mergers help here – larger and well financed airlines are better able to weather this turbulence, and to run stable and profitable operations.

But equally, a smaller number of larger airlines can more easily dominate certain routes or airports. And that means higher air fares.

“The bigger airlines get, the worse they become. The prices get higher, the seats smaller, the service ever snarkier,” according to Tim Wu, a law professor and competition advisor  to US President Joe Biden.

Affordable air travel is an important driver of economic competitiveness – Brussels’ current preoccupation – particularly where there is no viable road or rail alternative.

It’s also important on a human level. A survey by insurance company Allianz Partners released on Monday found that 55% Europeans who are not planning a holiday this year say they cannot afford one.

European consumer groups are already taking notice.

In January they put out a joint statement with aviation industry actors, warning of the dangers associated with further concentration of the airline industry, and calling on the Commission to proceed carefully when considering future mergers.

But the Commission’s calculus may need to evolve.

Airlines are particularly well placed to raise fares at busy congested airports. And Europe’s airports are only getting more and more packed, thanks to a mixture of climate concerns and local opposition blocking runway expansions.

In the 2010s, airport operator trade association ACI EUROPE used to fight for airports’ ‘license to grow’. But now the association concedes that airports’ previous “growth-dependent” business model is no longer sustainable, given “the limited possibilities to increase airport capacity”.

The airlines are well aware of this. Michael O’Leary, Ryanair’s colourful CEO, said last week that capacity limits at Dublin Airport would mean that “airfares in and out of Dublin this Christmas will be €1,000 return. They’ll be €500 each way.”

Europe needs a strong and sustainable European airline industry – that is uncontestable. As to whether we can also afford to get home to Mum and Dad for Christmas – that may ultimately depend on the Commission’s directorate for competition.

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[Edited by Zoran Radosavljevic]

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