How The ‘Big 3’ Airlines Are Forming In Europe

You will often see reference to the ‘US3’ or the ‘ME3’ when reading about global aviation. The US3 refers to the biggest three airlines in the US — American, Delta and United which as a result of mergers and consolidation now have by far the most market share in their markets and are three of the biggest airlines in the world. The ‘ME3’ refers to the biggest and most well-known airlines in the Middle East — Emirates, Etihad and Qatar.

Those two groups are even in a battle with each other.

Over the last several years, ownership structures in Europe have meant that Europe has slowly but surely developed its own ‘Big 3,’ with what has become informally known as the ‘EU3.’ It’s interesting that just like in the US, each of the main members of the ‘Big 3’ in Europe is a member of each of the big 3 global alliances — Oneworld, Star Alliance and SkyTeam.

It’s not quite as clear-cut as the US and Middle East, because they haven’t simply merged or grown by themselves into three separate, distinct brands — they are part of larger ownership groups.

Let me explain.

IAG

IAG began really growing with the merging of British Airways and Iberia in 2010. It has around 65,000 employees with a group fleet of over 500 aircraft, with hubs in Dublin, London, Madrid, Barcelona and Rome. Their brands are:

  • Aer Lingus
  • British Airways (including BA CityFlyer and OpenSkies)
  • IAG Cargo
  • Iberia (including Iberia Regional, Iberia Express and Iberia Cargo)
  • LEVEL
  • Vueling

They’re the most profitable of the EU3 with a net profit in 2017 of around 2 billion euros, with the British Airways brand contributing most of this profit.

I just see IAG as getting bigger, stronger and more profitable every year. They may not have the most popular brands in the market, but their leadership team knows how to run a business very profitably, and for a publicly listed company that is the primary objective.

Where to next?

The biggest news in IAG world this year has been their recent investment in Norwegian. This leads to all sorts of possibilities, the most notable being that IAG could acquire Norwegian completely. What they would do with it is anybody’s guess, from simply continuing Norwegian’s operations as is, to killing off Norwegian completely to protect their market share and profit margins.

I would assume that IAG plans to launch LEVEL from London at some stage to compete with Norwegian, but this will depend on what their plans are with their Norwegian investment, because Norwegian longhaul is a much better and stronger brand than LEVEL will ever be. IAG will have to do a lot more than just match Norwegian’s prices to beat them with LEVEL.

There have also been rumours for years that Aer Lingus will join oneworld, and I’m actually surprised this hasn’t happened yet, although apparently they’ve now decided they don’t want to.

Deutsche Lufthansa AG

More commonly known as the ‘Lufthansa Group,’ this group began growing once Lufthansa purchased Swiss in 2005. Lufthansa is a founding member of Star Alliance, and one of their biggest and most powerful members. With major hubs in Frankfurt, Munich, Zurich, Brussels and Vienna the group has more than 120,000 staff and more than 600 aircraft. Their brands are:

  • Air Dolomiti
  • Austrian Airlines
  • Brussels Airlines
  • Eurowings (including Eurowings Europe)
  • Lufthansa (including Lufthansa Cargo and Lufthansa CityLine)
  • Swiss International Air Lines (including Edelweiss Air)
  • AeroLogic
  • SunExpress (including SunExpress Deutschland)

Not surprisingly, the Lufthansa brand is by far the biggest and by far the most profitable of the group.

Lufthansa has been so successful partly because of the protectionist policies of the German government, which have limited the growth of the ME3 (and even Ryanair) into Germany. Lufthansa has not had to compete on price with low cost carriers in their home markets to the extent that many other European airlines have, and can protect their very valuable business traveller routes from cheaper competition.

There’s a certain prestige and sophistication about this group, especially as Lufthansa and Swiss still retain excellent first class products and lounges.

Eurowings was a part of Lufthansa Regional until 2014, then began operating flights as Germanwings. In early 2015 the group announced that the Germanwings name would be retired and all flights under this brand would be operated by, and called, Eurowings. Germanwings was involved in a serious incident in March 2015 where all 150 passengers and crew perished, as a result of the intentional action of the pilot.

I suspect if there was any doubt to retire the Germanwings brand prior to this incident, there was no doubt afterwards.

Where to next?

Lufthansa has plans to turn much of Brussels Airlines into its Eurowings brand but still with a proper business class as shown below. Though Brussels Airlines has a fairly small longhaul network, I find their substantial presence in West Africa (where they have loads of unusual fifth freedom routes) really interesting, and apparently this was one of the reasons Lufthansa invested in Brussels Airlines to start with.

I still see Eurowings as a low cost carrier even though they are installing a proper, lie-flat business class cabin. It will be interesting to see how this model fares.

Lufthansa also has submitted an offer to invest in struggling Italian carrier Alitalia. If this happens we may see Alitalia leave SkyTeam and join the Star Alliance family. This would make this group an even stronger presence in Western Europe.

Air France-KLM

This is probably the least exciting of the EU3 for me personally, because they are not hell-bent on conquering Europe like IAG and Lufthansa seem to be. Air France and KLM have been merged for 14 years and along with Delta have a lot of influence in the SkyTeam alliance.

They are not quite as spread out as the other two ‘Big 3’ and concentrate their operations mainly in France and the Netherlands.

They operate huge hubs, naturally, in Paris and Amsterdam with more than 500 aircraft and 85,000 staff. What I didn’t know was that despite KLM being a much smaller airline than Air France in terms of fleet and revenue, KLM is much more profitable. I suspect Air France’s never ending strikes may have something to do with this!

Their brands are:

  • Air France (including HOP! and Air France Cargo)
  • Transavia
  • Transavia France
  • Joon
  • KLM (including KLM Cargo and KLM Cityhopper)
  • Martinair
  • Servair

Where to next?

Air France-KLM seem less interested in merging with other European airlines, and more interested in simply cooperating successfully (and peacefully!) with their SkyTeam partners. They have a very close relationship with Delta — if you have ever seen Delta’s enormous presence at Amsterdam’s Schipol Airport you would realise this.

Air France-KLM have also invested a minority stake in Virgin Atlantic, which makes sense given their best friend Delta already holds 49% of Virgin Atlantic, and those two airlines work very closely together.

If Virgin Atlantic were to ever join a global alliance (and I doubt they ever will), it would undoubtedly be SkyTeam.

Ben has written several times about Air France’s confusing new brand, Joon. While it pitches itself as an airline for millennials (apparently I just fall into that category and Joon holds zero interest for me) it’s more likely that Air France is trying to circumvent the strict unionised labor conditions of Air France by starting a ‘new’ airline that they can then transfer their routes, planes and more importantly staff onto with lower pay and working conditions.

Bottom line

While there are no official, obvious ‘big 3’ European airlines, it has been interesting to see how these 3 groups have formed, through mergers, alliances and start-ups.

I certainly wouldn’t expect to see these airlines merge with each other, just as you wouldn’t ever expect the ‘Big 3’ US airlines to ever merge. Each brand is strong in its own country, so it makes sense to maintain the brands, and just cooperate closely. There would be uproar in Spain if Iberia changed its name to British Airways, for example.

There has been talk for some time that struggling Etihad may eventually merge into Emirates, which would leave the ‘ME2.’ Excluding the enormous LCC operators in Europe with their hundreds of planes, I wouldn’t expect to see some of the remaining European legacy airline groups like SAS or TAP swallowed up by the EU3.

But then again I never expected to see IAG invest in Norwegian, so you never know what will happen!

Where do you see the future of airline travel in Europe?

Comments

  1. Is there a way to understand the profit margins in terms of employee numbers, fleet number or ridership? I suspect that the Lufthansa Group may be leading on that front, but just a hunch based on my experience with working with the Big Three (BA, LH, AF) and their maintenance and engineering teams.

  2. I’m kind of surprised that IAG and LH haven’t bought AY and SK, respectively, by now…

  3. Again a great report!
    I thought SAS and LOT belong to the LH Group not only as Star Alliance members? Well, probably they just work pretty tight together . Hopefully they would not acquire AZ..that would be a “wunder tüte” of the absolute negative kind! EY has burned their hands..QR is warned to do it properly with Air Italy or suffer the same fate like EY..
    As for the future..I believe more consolidations..the EU market is a battle ground..conventional carriers against LCC..the winner here are the consumers, especially as the EU laws are favouring the EU population than the airline corporations..meaning the opposite of what is happening in the states!

  4. Very interesting and clear article James! As an Italian who holds status with Lufthansa I have mixed feelings on LH holding a major stake in Alitalia. On one hand it would
    be great to have direct flights from my home city avoiding stops at current LH hubs while still accumulating LH miles. Alitalia still has a few long haul routes even though not very many at present. On the other hand I’m really worried Alitalia may drive Lufthansa’s profits down the drain unless they manage to cut their very large personnel costs.

  5. Very nice article.
    Can’t we talk about an ME4? Is Etihad stronger than Turkish Airlines? This one flies to more countries than any other airline.
    How about an AP3 (Asia/Pacific)? China Southern, Singapore & Qantas, maybe?

  6. What about adding on to this wonderful piece with Asia and Oceania Big3? Would be an interesting read in my opinion!

  7. @Pedro
    There is a China 3 (CZ, CA, MU) and like the US, the main 3 are worse than some smaller ones in their country

  8. @Pedro
    Why the hurry? Did you run out of ideas or interest on the topic?
    You will get your time, be patienced!

  9. @Myles
    I beg your pardon?!
    The article mentions the other 3 (US and ME) – my question focus on one of them and if we can’t talk about 4 big airlines in the ME area or if we can’t consider Turkish bigger than Etihad.
    What is the matter with you? Have an answer for what I asked James? No? So, move on! Geesh, some people!..

  10. Here’s hoping that Lufthansa will keep their greedy, grasping, deceitful, creepy fingers off Alitalia. We don’t need or want a pan-Europe co-prosperity airline controlled from Berlin, thanks very much. Air France would be a much better fit for AZ.

  11. I get confused by IAG. I just switched status to British Airways (from American). Even though they own airlines like Are Lingus, why can’t I earn BA tier points with them? Any idea what their logic here is if there are not any reciprocal benefits between their own airlines?

  12. Lufthansa has for a very long time been rumoured to be interested in SAS. But the demise of Air Berlin and restructuring of Eurowings put everything else in the back burner.
    Now that IAG has its eyes set on Norwegian expect LH to make a run for SAS.

    @Paolo remember AirFrance- KLM owned a 25% state in Alitalia and wrote that off. After leaving with losses, I wouldn’t expect them to be interested in the hot mess that is AZ.

  13. It seems there is a correlation between the big 3 formation and FF program going revenue based…

  14. What explains the huge difference in staff to aircraft ratio of IAG (6,500 staff : 500 aircraft) to LH (20,000 staff : 600 aircraft)? Thats a difference of 2.5x!

  15. Would Turkish Airlines be considered the Big 4 of Europe? They do have quite a significant presence, along with Turkish Cargo & Pegasus.

  16. Turkish in the last couple of years was considered a gulf given its agressive growth and location from where it can reach most destinations in Europe, Asia and Africa with narrowbodies compared to other european counterparts who used widebodies for most of these destinations.

    @James
    In terms of passenger numbers, Ryanair and LH are way up there compared to IAG.
    IAG wins the ‘who’s who’ contest by some very healthy/great margins. LH still has a very high cost base whereas BA dealt with the cost base much earlier than the rest.

  17. @Paolo

    LH does not necessarily have to take a needy child called AZ. They are now more interessted in focusing to SAS. LH Group has enough presence in many Italian cities from their hubs in FRA, ZRH,VIE,MUC..so no need to take a sick child which life expectation has been in the decline for years..

    @Amir

    That is a good question. Like the momentarily question of Turkey’s position in the EU? Is TK an Asian or a Middle Eastern or European carrier..For me TK belong to Europe and is a good European carrier.

  18. What are the “protectionist policies of the German government” that you refer to??? Genuinely curious.

  19. Nice article James. You presented a good overview of the groups and their respective intentions. This passage about IAG was interesting:
    “They may not have the most popular brands in the market, but their leadership team knows how to run a business very profitably, and for a publicly listed company that is the primary objective.”
    This sums up the problem with many airlines and companies in general (especially the US3 and US companies) – money is the ruling factor. I hope that the Lufthansa group retain what they have and don’t fall to the temptation of lowering their standards for an extra couple of million in someone’s pocket.

  20. Can there be an EU3 with the British no longer members of the EU? Does anyone know if the Brexit open skies issues have been resolved? Is it safe to assume the EU member nations (and their airlines) could severely limit British landing rights if they found it in their interest? Maybe this topic can be tackled in another post by James.

  21. One also has to look at geography.

    US3 is simple because they are are all within a single domestic market. ME3 is easy because they are all long-haul international.

    Europe is a ridiculous mesh for flying. You need to fly from “each capital to each capital”, IAG could never compete with e.g. SAS or Finnair with just Stockholm/Helsinki-London/Madrid flights. Most routes are competitive with 2-3 carriers flying them, typically the “native carriers” from both countries and an LCC such as Rynair or Norwegian.

  22. Years ago when the LLCs were just getting started in Europe, a colleague of mine in KLM Passenger Marketing said that the typical European airline passenger would never accept the bare bones standards of the LLC carriers. He foolishly believed that Europeans were somehow different from the rest of the world.

    I imagine he’s eating that dinner of crow with a nice bottle of Heineken!

  23. I would also like if you could elaborate on the protectionist policies of the German government that you mention. Only thing I can remember is some kind of slot restriction for non-EU carriers (which Etihad for example tried to circumvent with the investments in AB and AZ …and we all know how that went), but I’m pretty sure that’s pretty much all the government can do. There’s no way they could do something against EU-carriers in my opinion.
    I also would like to know where you see IAG post-Brexit or post transition period if they really get out of the customs union.

  24. I always thought that IAG was created when BA bought IB. IB was struggling and when BA stepped in, they then renamed the company and continued to list on the FTSE, but switched headquarters to Madrid. Am I missing something here? Would welcome a clarification. Thanks.

  25. Very nice article. I am not convinced of a EuroUK3 (UK is not in Europe but next to Europe, ha ha, but that is a different matter).

    Ryanair and Easyjet are big players. They are not like Spirit and Frontier in the US. We might eventually see the EuroUK3 to be IAG, LH, and Ryanair. Or maybe a EuroUK4 for a long time (IAG, LHR, Ryanair, and cats/dogs, cats/dogs being Easyjet, KL/AF, and other bit players)

  26. Really surprised..that some here can not wait to see UK leave the EU..suddenly BA is seen as a leper whom nobody wants to be involved to..not in EU3..but more in UK3..Jeez, Continental mentality all over again!

  27. Geographically, the UK will always be part of Europe. It has, of course, chosen the path to economic ruin but it can’t remove itself for the continent

  28. I have to say, hiring James for OMATT has significantly increased the amount of Eurocentric content in a good way. These longer, non-news related posts have been solid content. Keep it up!

  29. I second that, @James should keep or focus on the European oriented topics..I believe there are a lot more European readers in OMAAT after all..
    OMAAT Euro edition, sounds great to me!!

  30. Interesting piece. I read here sometime ago that IAG was looking at Meridiana or its rebranding as air Italy. If Lufthansa takes an interest in Alitalia does one believe IAG would really go for air italy?

  31. LH Group would be a fool and a disaster in the making if they lay hands on AZ..let QR play with Air Italy, let us see how this experiment go..EY has shown it with AZ..it is a very difficult task with millions burning as if it is nothing..IAG had enough with its subsidiaries as well as LH Group with its own..AF/KL tried but failed also.
    It is a cut throat industry..win or lose..survive or die..

  32. The Air France / KLM merger is apparently still proving problematic – eg:
    https://www.theguardian.com/business/2017/jul/20/french-dutch-culture-clash-revealed-leaked-air-france-klm-report

    It surprised many when the merger happened – I think most of us had assumed BA and KLM would merge, their cultures being very similar and there being a good history of ever-closer cooperation which seemed to be pointing that way.

    I wouldn’t worry about IAG post-Brexit. Since the group has subsidiaries incorporated both in the UK and in rEU, it can continue to operate as it pleases.

    The comparison of staffing at LH and BA is interesting. One of the European low-cost pioneers (Freddie Laker) insisted that, to be efficient, no airline should employ more staff than the total number of seats on its fleet of planes. As a rough surrogate for the cost:income ratio it seemed like a handy guide. LH and AF are still struggling here, and Eurowings / Joon can be seen as an attempt to address that.

    The truly remarkable thing about IAG’s financial performance is that it has achieved it while carrying the full burden of all its past investment debt: every single one of the allegedly successful US3 has had to shed part of its debt through Chapter 11, screwing over huge numbers of people in the process, in order to become “profitable”. We may hate IAG for less exciting products, but their management appears to know what it is doing.

  33. Thanks James for this article. Just curious why Virgin Group’s brand (Virgin Atlantic, Virgin Australia) has no interest in joining an alliance? Always suspected VA to join Star Alliance with their strong ties with SQ and NZ.

  34. I have also often wondered when we talk about ME3, why do we ignore Turkish? It looks like they have a huge network and they carry almost the same number of passengers as Qatar.

  35. @Chris, they can’t join Star Alliance unless they reduce their ties with Delta. Both VA and VS have very strong cooperation with Delta, and really aren’t interested in United. Yet United is arguably the most successful American carrier in the UK and Australia.

  36. @ Roger

    “Yet United is arguably the most successful American carrier in the UK”

    I’m curious: what’s the argument?

  37. The virgin group is strongly tied with delta, therefore at this moment a star alliance membership is not in any near future or probably not at all. I do not see any advantage for the star alliance pax? From a European point of view..SQ,TG,NZ are strong and reliable feeders to and from AUS snd NZ..while flying across the pond EU carriers (LH,LX,OS,SK,LO..) in star alliance are plentifull..so actually VS and VA are not missed at all.

  38. I second the question..UA is the most successful American carrier in the UK? Do pls. clarify, I doubt it is!
    I even dare to go further and raise the question..from a European point of view..do star alliance pax still need UA feeders across the pond? Do you really fly UA? Beside flying to the states, where would you see flying UA is a good choice?

    It is obvious I am not a fan of UA. I can not even remember using them when flying to North and South America..just a comparison I once flew from EU via Canada to Brazil with AC and once with Avianca also from EU via Bogota to EZE..both are pretty easy on transferring and C products are both good..I doubt if it would have been a good flight with UA..

  39. Servair is a catering subsidiary not an airline brand!
    And for those wondering about the employee/plane ratio : the LH group encompass way more than “just” airline operations : LSG Skychef, LH Systems, LH Technik, LH Consulting, LH Flight Training … while AF and BA mostly have maintenance subsidiaries, they do not seem to have as diverse activities.

  40. Love the article another quality piece of reading. Agree with other readers about an Oceana/South West Pacific, and/or Asia article would be interesting.
    SQ is the king of this whole region.

    Can you please do an article about the fallout of Air NZ and VA Australia?? Doe SQ own stakes in both of them?

  41. @chucky. IAG is an airline conglomerate that intends to own profitable airlines and it is business model neutral so long as airlines meet their IRR. Their aim isn’t to make Oneworld bigger or to make a bigger full service airline – it’s more to make money out of aviation.

    @james. In what way does the German government restrict Ryanair? That would be illegal.

  42. @James I would also like to know which protectionist moves the German government allegedly applied to keep FR out of the country?? Did you have the Ecological Departure Tax intoduced in 2012 in mind? While added to every flight departing Germany, Ryanair CEO Mr O’Leary always argued, that it was discriminatory against FR as it is levied in a fixed sum, so it lookes worse on FR’s super cheap tickets. I am not so sure, if he really has a point there…

    For domestic flights, I would think that the small size of the country, efficient and affordable high-speed rail service and FR’s tendency in its early years to use remote airports just made them ineffiecient for German travellers.

  43. Just remind me again when it was that BA & IB merged? Coz that one sure did slip past me.

  44. I find this interesting development.
    There is kind of a rumor that KLM is profitable while AF loses money because of transfer pricing issue – AF is subject to higher corporate tax than KLM so as a group, AFKLM is structured to move some of its profits from AF to KL.
    IAG probably would be fine post-Brexit; it has large operations in Spain and will still be an EU3 carrier no matter what.

    Probably I might apply to write about Asian stuff when I retire in about a decade? (Based in Seoul, KR)

  45. IAG is partially owned by Qatar Airways, which owns 49% of Air Italy (which eventually shares the FFP with the other IAG brands). This is enough to consider Air Italy part of the IAG brands. While right now it means nothing, a quick expansion of the company as planned could greatly damage Lufthansa, as Italy is its second European market revenue-wise, and if the AZ purchase doesn’t end successfully (it won’t, at least in the short term), the rise of the new domestic competitor will be a major setback for LH interest in Europe.

  46. @Dennis
    I did not know that making money was a problem from a publicly-listed company! You know, customers can’t have it all – it’s either low fares and bad service or high fares and better amenities. Good service and low fares is a long-term recipe for disaster (see EY, SQ, CX, etc).

  47. You’re forgetting that LH is highly diversified- LSG caters all over the world, including HUBs of competitors (DTW is one example) and areas LH doesn’t have any flights to. They also do maintenance for pretty much anybody and everybody, including competitors. On top of that, they offer a swath of IT and Consulting services which not only airlines but also airports and other industries buy into.

    All in all, I’d love to see the concrete math and the assumptions you made gauging the strength and health and especially competitiveness of these three. I believe LH is the only one with enough peripheral business to carry the passenger segment in bad years. The other two don’t.

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