From consolidation and summer operations to greenwashing and policy shifts, Altair Advisory’s Patrick Edmond joins to discuss what's next for European airlines.

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Rush transcript

Victoria Moores:

Hello everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm Air Transport World European Bureau Chief, Victoria Moores. Welcome on board. This week I'm joined by Patrick Edmund, who is the founder and managing director of consultancy firm, Altair Advisory. Patrick, thank you very much for joining Window Seat today.

Patrick Edmond:

Oh, it's a pleasure to be here, Victoria, lovely to talk to you.

Victoria Moores:

It's great to see you again, because obviously you're a fairly familiar face at aviation events, particularly in Europe. Patrick has been in the industry for the past 20 plus years. I think I'll put it at that, Patrick. And you work in your consultancy work with obviously airlines, airports, manufacturers, ANSPs. So you've got that broad view across the industry. And historically you've also worked directly for airlines and also for Shannon Airport group too. So thank you very much for bringing that perspective to our conversation today.

What we're looking to talk about today, looking to sort of get beneath is really what's happening in Europe and what's our outlook for 2023. What's your sense of whereabouts we're at right now, Patrick? I mean we've seen that easyJet's issued their latest trading update. They're saying that demand is still going well. This resurgence of travel post pandemic is still there. What are your thoughts on this recovery in Europe?

Patrick Edmond:

Well, it's a good question, Victoria. And as you mentioned as we're having this conversation, the ink is still drying as it were on the easyJet results. But I think they're an interesting indication of how the industry sees demand over the coming months and we'll look forward to the Wizz Air and the Ryanair trading updates in the coming days. And broadly speaking, easyJet is saying things are looking good, demand is strong, they expect good revenue performance over the coming months. They're back up to near pre-pandemic levels and they are looking at a full year profit, which is better than they've been able to do for the last couple of years.

So that's overall very good news and I think we can expect to see similarly positive news from the other big LCCs in the coming days. The LCCs, of course, have grown their market share very considerably over the last few years and have bounced back faster post COVID than many of the network carriers. So this, if you like, is the happy end of the market. But that said, it looks from a European context certainly as though demand is back and certainly from that point of view, the year ahead looks relatively positive. Now we can be concerned about whether this demand can be met effectively given likely operational constraints. We can talk about what's coming down the tracks from a sustainability point of view, but if we think just about the commercial demand, the year is starting off relatively well.

Victoria Moores:

As you mentioned there, the LCCs tends to be the happy end of the market. Before we take a look into that crystal ball for this summer, and what might happen with that, what about the more challenging area of the market? So more of the network carriers, the regional carriers, what are you seeing from them at the moment? What's the sense that you're hearing?

Patrick Edmond:

So over the last few months, we've seen demand coming back strongly and we look even at some of the network carriers like Lufthansa bringing more aircraft and more wide bodies back into service than they expected to, to meet demand. That said, the network airlines, especially in Europe and Asia, are still dealing with both the aftermath of COVID and COVID-related restrictions and also the ongoing effects of the war in Ukraine and Russian airspace closures that result from that.

So for the network carriers, life is a bit tougher. Demand is coming back, but big chunks of the long-haul market are not doing as well as they previously had been. And therefore there's a need for reconfiguring networks and finding other opportunities to deploy fleets. That was seen most extremely over the last year with Finnair's problems when they could no longer overfly Russia and their need to essentially rethink their entire network strategy. That's not so bad for the other European carriers, but they still face challenges ahead to a greater extent than dedicated short-haul carriers.

Victoria Moores:

Yeah, that was where my mind went to, too, Patrick, with just thinking about the idea of the likes of SAS, the likes of Finnair, that not only has there been the impact of a lot of the Asian market being closed, but also this Russian overflight issue and obviously SAS is going through its Chapter 11 process still at the moment. I mean, what do you think are the prospects for that part of the world up in Northern Europe with those challenges?

Patrick Edmond:

I think it's very difficult at the moment because the outlook is so uncertain. We don't know realistically whether European carriers will be able to overfly Russia again within a year, within five years. Nobody knows because it's all tied up with the geopolitical situation. Therefore, the carriers such as SAS and Finnair that we mentioned who have previously been quite adroit at building networks based around their geographical location and the advantages of that location now face major challenges in rethinking how they operate.

In the case of SAS, for example, one thing that we see that's interesting is the increased reliance on long-haul narrowbody aircraft. So SAS has been deploying A321 Neos on transatlantic routes from smaller Scandinavian destinations. And I think that's quite a sensible way forward for airlines like this that maybe don't have quite such concentrated local demand and are trying to see ways of meeting that demand other than through a conventional hub structure.

Victoria Moores:

And sort of switching that over because again, that's bringing me back more into that low-cost, ultra-efficient model. In that part of the world you've got airlines like Flyr, like Norse Atlantic, like the revamped Norwegian, and I'm wondering what you think the prospects are for those carriers. Because they were certainly facing a few headwinds towards the end of last year.

Patrick Edmond:

They very much were, and I think Flyr and Norse Atlantic were facing into some particular headwinds and Norse Atlantic as an exponent of the low-cost long-haul model certainly has chosen to go into a challenging market. They've tried to do so I think in a fairly pragmatic way. But we see that whether it's Norse Atlantic, whether it's Play going through Iceland, that they are up against some big incumbents. Play is an interesting example because they seem to have managed thus far to build relatively well on the learnings from Wow Air and not to fall into the overexpansion traps, which were ultimately the downfall for Wow Air. But I think that the less established low costs, and you mentioned Flyr, Victoria, I think they are still finding it tough to establish themselves and I think it's going to be another couple of relatively dark months of Nordic winter before we see how things pan out there for the summer season.

Victoria Moores:

I'm thinking going to the other end of the spectrum to an airline that's been around for a very long time of Alitalia and the ongoing saga of the Italian flag carrier, which is now in the form of ITA. We've seen some movement on that just recently. Lufthansa is basically engaged in those talks and we've seen movement in a very stalled process I would say. What's your sense of can Italy create and maintain a flag carrier?

Patrick Edmond:

That might be a rhetorical question or it might not, but it certainly has been the soap opera for the industry since I can remember. The Italian market is a very large, very significant, very valuable market. And that's shown by the fact that there has been so much interest over the years by other carriers trying to find ways into that market, whether it was earlier attempts to buy into Alitalia, whether it was setting up Italian carriers as Qatar Airways did at one point, or whether it was finding ways to JV into the Italian market.

So what we've seen over the last few years is a significant growth in LCC market share in Italy. So Ryanair has been leading the way on that. Wizz Air is increasingly present in the market. Volotea is increasingly present in the market. So the market has evolved in the absence of Alitalia, now ITA, really being able to follow it. I think that Lufthansa's goal in investing in ITA is obviously to be the national carrier to be associated with that and to hoover up as much as possible of the corporate and premium leisure traffic. The challenge becomes, how does ITA get integrated effectively into Lufthansa Group from a network point of view?

For example, a few years ago, Lufthansa Group absorbed Brussels Airlines. Brussels Airlines now has a very effective, pretty much point-to-point network around Europe and serves its historic heartland of West Africa and Central Africa, but other than that has retrenched to some extent. So I think one of the big challenges for the future and something we'll certainly be watching is just from a network point of view how ITA would be merged into the wider Lufthansa Group entity.

Victoria Moores:

And sort of keeping this current focus for now, is there anybody else that you would say are, in terms of companies, airlines, stories to watch right now? Would you say that these are the main ones, it's the Nordics, the ITA, the newcomers that have still really got to prove themselves post COVID?

Patrick Edmond:

I think those are where we'll see most of the headlines. What's always worth watching is new carriers that are seeking to find niches and to develop. But I think the main story over the coming few months, other than any other geopolitical challenges which face us is going to be the evolution of those big groups and any other potential consolidation that may happen. And, of course, it's not that long ago that we were talking about potential consolidation in the low-cost sector and whether easyJet would become an acquisition target. Remains to be seen if any LCC consolidation happens in the coming months. But certainly the positive news we see from easyJet this morning and likely also from Wizz Air and Ryanair in the coming days will take some of the heat off all of the LCCs in terms of proving that their model is currently working.

Victoria Moores:

I imagine that the other thing that's going to be a hot topic over the next few weeks and months is going to be whether or not we're going to see that repeat operationally of summer '22 where the system was just creaking at the seams, unable to cope. What's your thought? Do you think that European airlines and airports and support companies have got that sorted now or are we going to see that again?

Patrick Edmond:

I'm hoping we won't see it as bad as we did in 2022, but I'm not sure that we're out of the woods yet. Part of the issue is simply with airspace constraints as a result of Ukraine airspace closure. As Eurocontrol has pointed out, much of Europe is now back up at perhaps 90% of pre-COVID traffic levels, but is operating in some cases in 80% of the pre-COVID airspace or pre Ukraine war airspace. So there are constraints in our route capacity.

But I think while progress has been made in terms of ground handling and operational staff since last summer, I don't think we're out of the woods there yet. I hope it won't happen, but I would still be concerned that at peak times there will be the risk of some disruption. And the other point to make in that context is where airlines and ground handlers are managing to bring their staff back, quite often they're having to do so at increased salaries and at unimproved packages. So that ultimately is going to feed through to higher costs for the industry as a whole over the coming months and the coming years.

Victoria Moores:

Yeah. And alongside that, obviously we've got the added pressure of sustainability and sustainability is adding cost. There's a huge package of regulation going through the European institutions at the moment. Fit for 55, which includes a refuel EU package, which has just been pushed back a bit through to March. So what's your view on the sustainability side? You cannot have a conversation about European or indeed any aviation right now without reflecting on sustainability too. Can airlines be sustainable financially and environmentally?

Patrick Edmond:

Well, a lot, as you've said, is going on in that respect. And in the latter half of last year, scarcely a day seems to go by without another press release about an airline agreeing to buy some seemingly large quantity of sustainable aviation fuel. Now there are a number of paths towards sustainability. We hear a lot of talk about electric aircraft, about hydrogen in aircraft, but the only thing that's going to move the dial over the next decade or two in terms of scale and in terms of being a drop-in replacement for existing fossil kerosene is going to be sustainable fuel. And that needs to scale up very, very fast.

As you mentioned, the EU has plans for scaling that up to ultimately 63% of total European aviation demand by 2050, although the parliament is pushing for still more, but that's going to take many years to get there. So the airlines that are announcing fuel purchase agreements now are doing so because they see they will have to buy this fuel over the coming years and they want to lock up scarce supply. So I think we're going to see an awful lot of pressure to roll out faster SAF production ramp ups because when we as an industry look at these percentage-blending mandates between ourselves, we say, "Oh, that's great. We're going to get to 5%, we're going to get to 20% and so on." But looking at it from the outside, that still looks like a relatively unsustainable industry. So I think the pressure is going to be on and that means increased costs are going to be imposed to become more sustainable more quickly.

Victoria Moores:

Yeah. And then there's the public perception issue. And I think that my sense is that of all of the regions in the world, the public perception pressure on sustainability is incredibly intense in Europe.

Patrick Edmond:

Yes.

Victoria Moores:

How do you think the airlines are doing with that? We're getting a lot of claims of increased environmental efficiency, et cetera, coming from the airlines. Do you think the door is still open there to further claims of greenwashing?

Patrick Edmond:

I think greenwashing has been a significant problem to date and there was a report in the Guardian last week about the efficacy of carbon offsets and offset schemes and the researchers suggest that up to 90% of offsets are not actually achieving the carbon reductions they claim to be. Now, even if that number is not precise, it's certainly true that producing and selling offsets is still very much the wild west. It's not an effectively-regulated market. And when an airline makes a claim that you can fly carbon neutral with us because you can offset your emissions, that's increasingly being viewed in a jaundiced way, not merely by the consumer, but by more and more advertising regulators.

For example, the Dutch advertising regulator, the Austrian advertising regulator have both over the last year found against airlines who have made claims about carbon neutrality through offsets. So I think the airlines are going to be in a difficult place because progressively, they will not be able to credibly suggest that passengers can offset their environmental impact by buying these relatively cheap carbon credits of dubious quality. They're going to have to start stepping up their game in terms of sustainable fuel and other genuine measures to reduce emissions.

Victoria Moores:

And we saw something I think along that path last year with easyJet. So easyJet was offsetting its entire domestic network for its customers, not asking them for a contribution towards it, but they just did this blanket offset of all of their network-wide emissions. They then stepped back on that late last year because under the Science Based Targets initiative, they don't recognize carbon offsetting. So I think that perhaps that was easyJet setting the trend of saying, if you're going to try and be SBTi certified, you need to find other ways. And obviously easyJet has been a bit of a leader in that eco field.

Patrick Edmond:

That's absolutely right. And the Science Based Target initiative, SBTi, has actually been quite effective in defining an appropriate hierarchy of ways for companies to reduce their impact. And offsets are accepted just for the last five or 10% typically of emissions which cannot be abated any other way. The difficulty for the industry is the other way to abate those emissions is SAF. SAF is going to take time to scale. So moving away from offsets is a good thing, but it does put an awful lot more pressure on airlines getting access to sustainable fuel and accepting the higher costs that will come with that. And that ultimately means we're going to be facing higher ticket prices over the coming years.

Victoria Moores:

Yeah. Which puts airlines in this catch-22 situation between carbon offsets, the readiness of SAF, sustainable aviation fuel, and then also that public perception pressure to get this right. And I think the answer to every single element of that catch-22 is going to be cost. So it's going to be needing to basically pay out more, which is going to put more pressure on those thin margins.

Now, Patrick, we're just about up for time for today. I'm wondering as a final question, is there anything that you see that's slipping under radar, anything that's not being talked about that should be being talked about right now, just in a nutshell?

Patrick Edmond:

That's a nice wide question. One of the things I see coming down the tracks is, again, in a European context, the planned revision to the aviation regulation, the catchy named EC 1008/2008, which sets many of the fundamental rules for airline operation in Europe. There's a little bit of jockeying for position amongst some of the transport ministers on this one, but there is a very clear sense that when the regulation is revised, it's going to focus more on what kinds of aviation are to be supported. For example, regional aviation connecting remote areas and what kinds are not going to be supported. For example, short-haul flights in competition with high-speed trains, or low-cost flights which are selling below cost in order to drive additional traffic.

So I think we're going to see policy shift, which is actually going to start focusing a little bit on supporting some kinds of aviation and reducing support or indeed trying to reduce altogether other kinds of aviation. So the environment certainly within Europe is likely to change over the coming months and the coming couple of years. That isn't really on the radar just yet.

Victoria Moores:

Absolutely. Well, thank you very much for your insights today, Patrick. I really appreciate speaking with you again and obviously hearing your thoughts on what's going on in Europe.

Thanks also to our producer, Guy Ferneyhough, and thank you to our listeners. Make sure you don't miss us each week by subscribing to the Window Seat Podcast on Apple Podcasts or wherever you listen. Until next week, this is Victoria Moores disembarking from Window Seat.