Weaker airlines set to feel the pinch in Europe's overcrowded market: CEOs

September 8, 2016 11:25 AM EDT

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By Sarah Young

LONDON (Reuters) - An increasingly competitive European airline market could soon bring consolidation and possibly European low-cost carriers providing local connecting services or "feeder" flights for full-service long-haul airlines, the CEOs of easyJet (NYSE: EZJ) and IAG said on Thursday.

Low fuel prices have led to a big growth in capacity on European routes, putting market expansion at a 10-year high on forecasts that airlines will add new capacity of 8 percent over the next six months.

But inevitably increased competition is causing fares to drop, good news for consumers but bad news for the profit margins of airlines.

Carolyn McCall, the chief executive of low-cost airline easyJet (NYSE: EZJ) said she expected more consolidation over the next 12 to 18 months, with weaker airlines suffering in the tougher trading conditions, as the previous boost to margins from lower fuel prices is competed away.

Willie Walsh, the chief executive of British Airways-owner IAG, said IAG was not currently actively considering any acquisition deals.

"I think there are airlines out there that would like to be consolidated into a larger group, I get calls from a lot of them," said Walsh, who has been Europe's most active acquirer of airlines in the past five years, combining BA with Iberia to form IAG, which has since taken over Spanish budget airline Vueling and Irish airline Aer Lingus.

Deutsche Bank on Wednesday downgraded its investment recommendations for Ryanair , Lufthansa , Air France-KLM and IAG, with the analysts saying there was too much capacity in the industry and prices would fall further this winter. [nL8N1BJ1EL]

Price drops could stimulate further change in the industry in the longer term, McCall said.

Some higher-cost full-service airlines could retrench, cutting back their own short-haul operations and giving low-cost airlines like easyJet the opportunity to step in instead to provide the feeder flights needed for their long-haul operations, as well as expand route networks.

With legacy carriers such as Air France-KLM and Lufthansa struggling to bring costs down on their namesake brands to compete with low cost carriers on short haul routes, using low-cost carriers instead for feeder flights could be a more cost effective way of bringing passengers to hubs for long-haul connections.

There have been suggestions for well over a year by both Ryanair and easyJet, Europe's two biggest low cost carriers, that they could provide feeder flights for long-haul carriers, but so far no deal has been struck.

However, both Air France-KLM and Lufthansa have been building up their own low-cost carriers, Transavia and Eurowings. In addition, one key sticking point has been deciding which carrier would bear the costs of rebooking and accommodation in the event of missed connections.

"It would make a lot of sense for us to offer feed. The thing for us we have to think very carefully about is that it doesn't contaminate our model," McCall said.

"I think it's inevitable that over the next five to 10 years there will be much more of that happening, there will be many more alliances and partnerships where low-cost feeds the legacy carriers."

IAG would be open to the concept, Walsh said, noting that already its customers fly into easyJet bases like London Gatwick and connect onto a British Airways flight without there being a deal between the two carriers.

"If we can facilitate that for the customers in a way that makes sense that doesn't increase our costs or complexity ... then we want to do it," he said.

However, Lufthansa said it already has a low-cost carrier within its group, Eurowings, and therefore does not need to use third parties. "We don't need any additional support here," a spokesman said on Thursday.

(Additional reporting by Victoria Bryan in Frankfurt; Editing by Greg Mahlich)



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