Consolidation, sustainability and operational stability will be core themes for European airlines in 2024 following a spate of mid-sized flag carrier acquisitions, geopolitical uncertainty, air traffic control disruption and the ripple effect of engine supply and maintenance issues.

Overall, IATA expects European airlines to end 2023 with a stronger than anticipated financial performance despite the capacity and supply-side constraints. With strong demand for air travel expected to continue in 2024, IATA also sees net profit for the region marginally strengthening. Key risks, IATA says, relate to a tight labor market and the wars in Ukraine and the Middle East. IATA forecasts a net profit of $7.7 billion across European carriers for 2023 versus $4.1 billion in 2022 and a net profit of $7.9 billion in 2024. That will put net margins at 3.5% this year and 3.3% next year. Demand in RPKs will be 10.5% higher in 2024 versus 2023 and capacity in ASKs will grow 8.8%.

With ongoing European consolidation, Lufthansa seems set to acquire 41% of ITA Airways, Air France-KLM is taking a 20% stake in Scandinavian Airlines (SAS) and International Airlines Group (IAG) is taking full ownership of Air Europa. TAP Air Portugal is the last major piece to fall into place.

“We’re coming to the tail end of European consolidation, certainly among the flag-carrier-type airlines,” observed Patrick Edmond, managing director at consultancy firm Altair Advisory. “I just don’t see any other big players to be swept up.”

Edmond sees TAP as the final “big prize.” All of the big European airline groups have shown interest, but Edmond believes competition remedies will ultimately push IAG out of the running, leaving a “two-horse race” between Air France-KLM and Lufthansa.

“I think that Air France-KLM getting hold of SAS, if anything, increases their ambition to also grab TAP,” Edmond said. If Air France-KLM does emerge as the winning bidder, it would further strengthen the SkyTeam alliance in Europe and put Air France-KLM on more of a level pegging with Lufthansa Group. The loss of both SAS and TAP would be a double blow for the Star Alliance.

Turning to the European LCC sector, long-haul operator Norse Atlantic could be one to watch. Norse launched flights in June 2022, using ex-Norwegian Boeing 787s. The company made its first quarterly profit in Q3, but Norse has been struggling with higher fuel prices, soft winter demand and a weaker than expected cargo market in a highly competitive market—the transatlantic—that is once again booming.

At the release of its Q3 results, Norse talked about reduced liquidity and an accelerated payment plan with a key supplier, triggering the airline to seek and secure $55 million in funding to weather the winter season. Norse has launched a strategic review and hired Seabury as advisors to explore “industrial opportunities” with two unnamed airlines.

Scandinavia has been a tough place to do business. SAS is going through Chapter 11 restructuring and Swedish regional airline Braathens Regional Airlines (BRA) applied for court-led financial reorganization on Oct. 19. BRA is attempting to reverse its fortunes by leasing three Airbus A320s, which will be used for tour operator contracts. This is a new aircraft type for BRA, which is primarily an ATR operator.

Edmond finds BRA’s decision to add A320s puzzling. “Obviously from the lessor’s point of view, they are comfortable enough to still place the aircraft,” he said, noting that the charter and wet-lease market is very crowded and Swedish labor costs are “legendary.”

Meanwhile Icelandic LCC PLAY, which launched European operations in June 2021 and went transatlantic in 2022, sees 2024 as a year of stabilization ahead of further growth in 2025.

“They actually seem to be making a go of it at the moment,” Edmond said. “They’re doing some interesting stuff, and they seem to be reasonably disciplined in what they’re doing, so I give them credit for that.”

POLITICAL UNCERTAINTIES

Meanwhile, airlines are closely monitoring developments in the Russia-Ukraine conflict and escalating tensions in Gaza. UK LCC EasyJet CEO Johan Lundgren said the market’s response to the Gaza conflict has been almost identical to that of Russia’s invasion of Ukraine. Google flight searches were impacted for around five weeks, with a gradual improvement from week six. As of year-end, there has not been any impact on easyJet’s summer 2024 bookings. EasyJet’s flights to Tel Aviv and Jordan have been temporarily suspended.

While the closure of Russian airspace has become an operational normality for European airlines, Asian traffic is returning, and Chinese airlines have the advantage of being allowed to overfly Russia. Edmond questioned whether the European Union might seek to level the playing field by levying additional tariffs on Chinese airlines.

“If I were a big European long-haul carrier, I’d be starting to say, ‘Hang on, this isn’t fair,’” he said.

For now, the European Commission’s attention seems to be firmly focused on sustainability and one topic to watch is the possible extension of the European emissions trading scheme (EU ETS) to long-haul flights. This will depend on whether ICAO’s CORSIA scheme is determined to be in line with the goals of the Paris agreement.

“Spoiler alert: it isn’t,” said Edmond. “And if they judge that it isn’t—and it’s hard to see any way they could judge otherwise—then they’re going to extend the EU ETS to long-haul flights from Europe.”

European airlines are also facing growing claims of greenwashing, with several facing litigation based on their emission reduction/green flight claims.

Casting an eye forward to summer 2024, demand looks strong, but narrowbody capacity will be constrained by Pratt & Whitney engine groundings, limiting growth prospects for some airlines.

“That’s going to last well into 2024,” Edmond said. “In some cases, this will be the straw that breaks the camel’s back [for airlines], but I don’t think it’ll be the sole factor.”

Further European air traffic control disruption is also anticipated and all three major European LCCs—easyJet, Ryanair and Wizz Air—are investing in schedule resilience.

“The question is which comes first: the heat death of the universe or the Single European Sky,” Edmond said, noting that this bleak prediction is “not funny at all.”