BA plays consolidation game

Eddington: 'KLM deal is important opportunity'

by BBC News Online's Brian Wheeler

Europe's airlines are locked in a bitter fight for survival, with the biggest of them all, British Airways, determined to emerge from the melee stronger than ever.

Endangered species?

Sabena

KLM

Aer Lingus

Olympic

Alitalia

SAS

The British carrier is using the current crisis to resurrect its £5bn take-over of Dutch carrier KLM, which fell apart last year amid EU competition concerns.

This time, the regulators are likely to look more favourably on a merger.

The EU is only too aware of the new reality facing the airlines post 11 September, which can be summed in one phrase: consolidate or die.

Restructuring needed

Over the next 18 months, a whole tier of middle ranking carriers, such as KLM, Alitalia, Sabena and Aer Lingus, could lose their independence or disappear altogether.

Their routes will be greedily scooped up by budget carriers such as Ryanair and Easyjet, which have both reported big increases in profits since 11 September.

The cosy world of the small, state-protected, national flag carriers is likely to disappear forever.

BA chief executive Rod Eddington believes restructuring of Europe's fragmented air market is long overdue.

It is the only way, he argues, that the continent's aviation industry can compete with the US, which went through a similar process in the 1980s and 1990s.

Consolidation trends

Consolidation has swept through most industries in the western world, but because of their status as national standard bearers, it has so far eluded the airlines.

"The tragedies of 11 September have the potential to push that process along quite dramatically and Brussels is taking a sensible line, recognising that consolidation has to take place and that that it needs to make sure that large-dollops of state-aid do not stop that happening," Mr Eddington said.

BA is attempting to play its part by resurrecting the KLM deal, which it described as "a very important opportunity if we can find a way forward".

"We are talking to them at the moment, with Brussels' blessing, on whether or not we can do some work with our joint networks right now," he added.

More job losses

Meanwhile, SAS has become the latest medium-sized airline to announce major job cuts since 11 September.

Posting nine-month profits below expectations and warning of a full-year loss, the Scandinavian carrier said it would slash 13% of its workforce - about 2,500 people - in a drive to cut costs and restore profitability.

The trend is likely to continue in the coming months, particularly with those airlines with big exposure to transatlantic routes, such as Aer Lingus.

Future shape of market

Michael O'Leary, Ryanair's chief executive, echoed many in the industry when he predicted the future shape of Europe's air market.

"There will be the big three, British Airways, Lufthansa and Air France, and two or three large budget carriers, of which Ryanair will be the leader," he told the BBC.

Mr O'Leary said it had "never been easier" for companies like Ryanair to expand into Europe, because the bigger players, especially BA, SAS and Alitalia, were abandoning routes.

Budget carriers can make city-to-city routes pay by paring costs to the bone and slashing ticket prices to ensure full capacity.