An upcoming shakeup in European skies

By Vincent Valery


Mar. 3, 2020, © Leeham News: After the 2012-2014 European sovereign debt crisis, passenger traffic grew briskly in Europe. The expansion of low-cost airlines, combined with increasing passenger traffic from Asia, contributed to this passenger boom on the old continent.

Despite the passenger traffic boom, the last few years have been challenging for most European airlines. Apart from a few notable exceptions, profitability is materially lower than at US carriers. There were several high-profile bankruptcies, notably Air Berlin, Alitalia, and Monarch, in 2017, followed by Thomas Cook last year.

LNA wrote a series last year on the struggling European carriers.

After starting in mainland China, there have been significant COVID-19 outbreaks in South Korea, Iran, and Italy. The number of diagnosed cases is increasing rapidly around the world, and notably in Europe.

Until two weeks ago, European airlines canceled most of their services to mainland China and reduced frequencies to other Asian destinations. However, with the outbreak intensifying in Europe, numerous carriers took emergency measures to reduce service on intra-Europe services.

European airlines are facing the COVID-19 disruptions with weakened balance sheets. To make matters worse, they have become the target of numerous environmental groups in Western Europe. The ongoing slump in passenger traffic will stretch some carriers’ finances beyond recovery. The much-discussed consolidation wave seems a matter of when, not if.

The financial challenges will undoubtedly affect OEMs, notably Airbus and Boeing.

In this article, LNA lists the scheduled OEM deliveries in countries affected by the COVID-19 outbreak, then assesses the financial vulnerability of major European airline groups.

  • A global COVID-19 outbreak;
  • Emergency airline measures to reduce capacity;
  • Almost all OEM 2020 scheduled deliveries affected;
  • Financial vulnerability at European airlines.

Spreading impact of coronavirus

The COVID-19 outbreak now affects more than 75 countries. Using the latest information from a John Hopkins University map and CIA world factbook population data, we compute the infection rate by country.

We display individual countries with 100 or more confirmed cases. We aggregate by region for the affected countries. The population total per region comprises the countries affected.

Among countries with 10 or more cases, the infection rate is north of 10 per million in China, South Korea, Italy, Singapore, Hong Kong, Kuwait, Bahrain, and Macau. South Korea has the highest infection rate.

Some countries banned flights to destinations severely affected by the COVID-19 outbreak. Numerous companies have implemented travel restrictions for their employees, including for domestic and short-haul international travel.

IATA published a chart that shows the annual passenger revenues for the most affected countries. It also shows the percentage of global passenger traffic each state represents. Six among the most affected countries (China, Japan, Italy, South Korean, Singapore, and Iran) represent close to $200bn annual revenues and 31.5% of global passenger traffic.

Airlines taking emergency capacity measures

As outlined in a previous article on the topic, Chinese airlines drastically cut capacity in response to a collapse in demand. Foreign carriers stopped almost all services to mainland China. Those restrictions are still in place. US carriers have canceled flights to China until the end of April.

With the spread of the virus to other countries, airlines have significantly reduced service to South Korea, Italy, and Iran. United Airlines announced flight cancellations and frequency reductions on its entire Pacific network. American Airlines and Delta Air Lines announced the suspension of services to Milan.

However, European airlines started taking more drastic measures. Lufthansa announced it would ground the equivalent of 23 long-haul aircraft. The German airline group will also reduce capacity by 25% on short and medium-haul routes. Alitalia announced the suspension of 20% of its services for March. British Airways, EasyJet, and Wizz Air are among many to have significantly reduced flights to Northern Italy.

Numerous countries in the Persian Gulf suspended flights to Iran. Bahrain also suspended flights from Dubai.

And stepping up cash preservation measures

Air France-KLM and Lufthansa announced hiring freezes, delay of technology investments, as well a halt to outside consultant work. Numerous airlines (including Lufthansa) are offering unpaid leave. Others, such as Cathay Pacific, are asking staff to take unpaid leave.

One should expect airlines to soon delay or suspend aircraft deliveries with OEMs.

COVID-19 hit countries represent the majority of 2020 deliveries

Below is a table with the scheduled 2020 deliveries at Airbus, Boeing, and Embraer:

Around 16% of 2020 aircraft deliveries are to European countries. Airbus is the most exposed. If we include all countries affected by the COVID-19 outbreak. The majority of OEM deliveries are to COVID-19 countries. However, not all deliveries are going to be equally affected.

We will now turn our attention to airlines in the European Economic Area.

Some airlines with already strained balance sheets

Below is a plot with basic financial metrics for airlines in the European Economic Area that generation more than one billion euros in annual revenues:

For the yearly turnover and profit margin, we use the latest available 12-month rolling data.

Alitalia and LOT, both effectively owned by their respective governments, do not publish earnings. Alitalia has been under court supervision since 2017 and loses around a million euros per day. LOT’s revenue figure does not take into account the pending acquisition of Condor.

Air Europa, owned by Globalia, is in the process of being acquired by IAG. Globalia does not publish standalone accounts for its airline subsidiary. Globalia announced that Air Europa had a €100m operating profit in 2018.

One should note that the revenue figures for TUI and jet2 include vacation packages. Annual revenues at all TUI airlines are between three and four billion euros and around 1.5 at jet2, respectively.

Varying levels of leverage

The debt to equity ratio calculation includes the effects of IFRS 16. The new accounting norm requires airlines to add operating lease liabilities on their balance sheet. For Virgin Atlantic, which has not yet published accounts under IFRS 16, we included operating lease liabilities in computing the ratio.

Easyjet, Ryanair, and Wizz Air have a debt to equity ratio below three. Air France – KLM, Norwegian, SAS, TAP, and Virgin Atlantic have a debt to equity ratio above 10.

And aircraft ownership

To assess an airlines’ ability to withstand a negative demand shock, one also needs to analyze the portion of its fleet under lease. Below is a breakdown for the airlines listed above:

Jet2, Ryanair, Icelandair, Lufthansa, and Easyjet own more than 70% of the aircraft in their fleet. Aegean, TAP, TUI, Air Europa, and Wizz Air own less than 20%.

Some airlines in a strong position

Of all the airlines above, Ryanair has the strongest balance sheet and the highest profitability. The carrier could take advantage of the circumstances to fill capacity gaps or acquire rivals.

Among the legacy carriers, IAG and Lufthansa are in the best positions to capitalize. IAG is the most profitable legacy airline, while Lufthansa has the strongest balance sheet.

Air France-KLM’s high leverage will prevent the group from capitalizing on investment opportunities that might arise.

But others in a weakened position

Norwegian Air Shuttle’s financial woes are well documented, including in an LNA article. The airline’s latest cash injection did not provide an adequate buffer for a shock of this magnitude.

TAP Air Portugal is also in a weakened position. Financial leverage is high and almost all of the airlines’ fleet is under operating leases.

SAS has suffered in recent years from low profitability, a deteriorating balance sheet, and a pilot strike last year. The airline had to implement a drastic restructuring in 2012.

While the headline debt to equity ratio might not suggest so, TUI Group airlines could come under pressure. The airline has underperformed financially. Almost all of the carrier’s fleet is leased. To make matters worse, the travel group has to contend with a slump in its holiday packages and cruise divisions.

Jet2 expanded capacity to fill the void left by Thomas Cook’s demise. Its parent, Dart Group PLC, had a healthy balance sheet the last time it published results. However, rapid expansion could lead to cash flow problems if customers fail to book holiday packages.

Current circumstances will make it harder, if not impossible, for the Italian government to find a buyer for Alitalia without much larger job cuts.

A significant shakeup in the making

Unless the COVID-19 outbreak stops soon, the effect on airlines will be more substantial and more widespread than SARS. It is no exaggeration to say it could surpass the financial impact of 9/11. Those are trying times for the airline industry.

Given their subpar profitability, the intense competition, and political pressures, European airlines are particularly vulnerable. Numerous airline executives in the region have pointed out the need for further consolidation.

The European airline landscape could look vastly different in a year, which could materially affect OEMs. We will analyze the potential impact in the next article.

47 Comments on “An upcoming shakeup in European skies

  1. Off topic sorry

    I flew on one of the new A321neo aircraft of British Airways. It was a 4 hour flight to Moscow and luckily it was quite empty. Wafer thin ‘see through’ seats, limited space (guess 28-29 inches), no recline, no IFE, the toilets in the galley. This hard product is no better than Ryanair. How can BA even consider differentiating on price when their base product is so austere? Food? A sandwich.

    Contrast this to the service on the old 767s back in the 90s. You sat in an armchair, full service and space, lots of space. The flight was also usefully shorter then by maybe 20-30 minutes. A full food service and I forgot IFE too!!

    Perhaps one reason for reduced flying is the dramatic drop in the standards, even at a supposed prestige ‘flag carrier’. I can’t see any reason why BA can command any premium when there is no essential difference in the product to Ryanair/ EasyJet/ Wizz

    • “How can BA even consider differentiating on price when their base product is so austere?”

      You can differentiate anything on price. Even the red seats versus the blue one 🙂
      ( high praise for their old A319 product relative their 777-200 seating.)

    • 10 years ago I flew with BA from UK to JFK. A lady in my row ordered champagne but not only one bottle, she had three on her tray 🙂 That might be past too.

      When I read about accidents on wikipedia I wondered about the few pax on Russian airlines. Russia doesn’t have much business, how can their airlines even survive. Designing the CR929, for what?

      People are flying more now and will recognize bad comfort and might choose a different airline next time. On an A321 at least you can have a much greater chance to have a wide enough seat depending on aisle width. Agreed, 767 is a good experience.

      This is definitely a great time to expand. Corona will be cured next year.

      • “When I read about accidents on wikipedia I wondered about the few pax on Russian airlines. Russia doesn’t have much business, how can their airlines even survive. Designing the CR929, for what? ”

        you may want to reconcider:

        What I often wonder is were some posters draw their “facts” from?
        You sometimes get the impression that the view of the world abroad is dominated by pastoral images of artisans forming tools from flint stone.

      • Are you crazy? if you stand far enough from something then you can’t see. you seem to suggest that Russia is living in the Stone Age based on no evidence whatsoever. And from that complete lack of knowledge you infer or suggest things based on prejudice and bigotry.
        Russia doesn’t have much business..
        How can airlines survive….
        A321 has a wide seat? Against what? Certainly not the B767

        Tell you what, I felt far safer walking around downtown Moscow than New York late at night for what it is worth.

        • What’s your problem, you said it yourself
          “flight to Moscow and luckily it was quite empty”.
          I just picked up on it and gave other examples LOL

          You said yourself “on the old 767s, lots of space” and I agreed LOL

          I didn’t compare the seat width of the A321 with the 767.

          I never walked through downtown Moscow, but I was on the Moscow airport, transfer to another flight. When I walked alone to another terminal the airport was completely empty, completely, I saw no one, after one hour they opened a checkpoint for 3 pax, at least 2 ladies joined me then. I didn’t say Stone Age, how could you come up with this.

          Sorry Vincent for my life experience.

          I guess you mean NY City. NYC is just a bad example because it’s very safe. I was there many times, spend years of my life there and I’m not a US citizen. Walked alone through Jamaica Queens in 2004, I noticed that I was the only white there but I wasn’t scared. Walked alone through Bedford-Stuyvesant in 2010 where all shops were closed at daytime and saw police at least in a 6 cop strength. If you are waiting in a Manhattan subway station for a longer time than usual you will be asked by cops in jeans. Police is so much armed that they used 50 bullets for one criminal.

          • all Moscow airports combined have well above passenger volume for O’Hare…say 85 mill
            Sheremetyevo , Domodedovo and Vnukovo combined 102 million in 2019. Theres a 4th Zhukovsky but thats very minor with 1.5 mill.

            This is why no one believes your comments, especially ‘saw no one’

          • “”This is why no one believes your comments, especially ‘saw no one’ “”

            I don’t care what you believe, I didn’t say I travelled in 2019.
            The accidents I read about on wikipedia didn’t also happen in 2019.

            Because of Uwe’s comment I checked traffic, found data from 2018. Turkey, Indonesia, Brazil each had more traffic than Russia.

        • “Tell you what, I felt far safer walking around downtown Moscow than New York late at night for what it is worth.”

          Fair enough but I would feel that the safest downtown is Pyongyang.

          • I am a tad confused, you suggesting that Moscow is safe because? It is a major city, probably the largest conurbation in Europe depending on how you measure things. So comparable to NY, London, etc.

            Not sure how that links to Pyongyang which is a very different beast.

            It is ironic thar Sheremetyevo, Domodedovo, Vnukovo were the worst places you could ever fly to in the past. Nowadays they are the picture of modernity with proper rail transit links and everything that you would expect of modern infrastructure.

            Flying to JFK or most anywhere in the US seems to be stuck in a time warp of the 70s. The infrastructure is poor.

    • I would agree completely, BA is not the airline it once was. I’ve travelled on BA for nearly 30 years, and I certainly won’t pay the premium just for the BA brand.

      The brand is not everything, you have to have a decent product to maintain your brand.

      For me, BA is no longer “the world’s favourite airline”.

      For long haul, I’d far rather travel Virgin, Air Canada, or American.

      I recently travelled on Vueling, another of the IAG airlines, and that was fine, clean new A320Neo, thin but fairly comfortable seats, much the same as Easyjet, better IMHO than Ryanair. I was moved from standard seating to the premium seats at the front of the aircraft, but I have to say I wouldn’t pay the extra, they felt exactly the same as the seats in the rest of the aircraft.

      Realistically, if you’re flying first class or business, BA will be good for you, if you’re flying economy (coach), you’re probably better off on Easyjet or Vueling.

  2. Vincent, thanks for the interesting/scary analysis. Unfortunately, none of the tables/plots mentioned in the text show up for me. Can you please check if those have been published properly?

    • Hi Ben, sorry about this. I think it is because I gave a specific name to the tables that prevents people without account from seeing it. Do you have an LNA account? Even without a subscription, you should see it.

        • Does it look better now? If so, my sincere apologies for the mishap. I’ll know next time how to avoid the issue

      • @vincent valery
        Your tables are very informative, but how do you quote a population for Africa as 412 million?

        Perhaps figures are not quite as precise as for other continents, but usually quoted is 1.2 billion, 1.3 billion

        They do say, in Central Africa at least, that higher resistance to malaria and various jungle viruses, will afford protection against the ‘China virus’

  3. Newspaper here ( ) today wrote about up to 50 % of booked passengers not appearing at the gate for their flight.
    ( no differentiation given as to destinations : local, inter EU, longdistance .. )

  4. Perhaps some of the carriers with 737 heavy fleets will be glad Boeing is sitting on 500 jets.

    • Certainly interesting:
      787 pileup was damped by the GFC.
      MAX pile up could be damped by CoVid19.

      happenstance, coincidence or enemy action?
      ( to leverage one Mr. Bond here )

      • @Uwe…maybe straight out of Bond’s “Moonraker” movie.

        • Its the 14th-15th century all over again …child saints, plague cities.
          This is when the process of quarantine was invented in Venice ..quaranta giorni meaning 40 days

          • The 40 days thing goes further back.
            Desert tribes ingested someone into their tribe after 40 days traveling with the tribe.
            Jesus was scoped into “Gods Tribe” after 40 days in the desert. Go on from there.

          • “Its the 14th-15th century all over again …child saints, …”

            ROFL, great line thanks.
            Chicken Littles like David Sluzuki will probably blame corvid on global warming that isn’t happening quickly, ignoring that the European plagues were in cool eras.

            “…plague cities.”

            Many old diseases lurking around, Ebola was a pop-up of one.

            But better sanitation, better nutrition, and better medical knowledge and medicines make a huge difference.

            Except where mysticism rules, such as the country in western Africa where a funeral custom is laying hands on the dead body – people. !

            In contrast people in an east African country stomped on an outbreak, the president there even went on TV and advised people.

            The diseases I worry about are the rapidly mutating ones like influenza, and perhaps obscure ones though a new DNA database-searching technique greatly helps diagnosis by matching patterns.

          • No Reply button on my earlier reply, so I’ll add that also scary is where the source of infection is not known, as may be the case in some Puget Sound cases.

            In contrast, most of 14 cases in Vancouver BC reported a few days ago had known contact from hot spots like Iran.

            It appears that like influenza you can have the infection and be contagious but not yet feel bad.

   has some information.

          • “”It appears that like influenza you can have the infection and be contagious but not yet feel bad.””

            I read that somewhere too. That’s the reason why the virus can spread so fast and easily.
            This virus stays in big volumes in the nose-mouth area, that’s why you don’t feel bad. The flu stays in the lungs and makes you feel bad fast.

          • Adding to my previous posts, one article today suggests to me that the puzzling infections in the Seattle area probably came from a care residence that had a big celebration attended by many people from outside such as friends and relatives of residents.

            If I understand correctly, the deaths in the residence were almost concurrent with the party thus the deceased must have been exposed well before.

            Care residences are high risk because staff are in frequent contact and often providing bathroom care and many residents are in poor health. The one I had experience with elsewhere was quick to quarantine a resident and don protective gear. But at least one weak person died of influenza late last spring.

            (There was an outbreak in the residence, two A strains were in the city , the vaccine had negligible effect on one strain, substantial on the other in theory but only 66% effective as is typical, likely much less than that for older people.

            A higher strength vaccine is now available, recommended for older people on the theory that response to vaccine is much weaker in older people. It is up to four times as strong, but so far only trivalent whereas the normal vaccine is quadvalent now (covers four strains).

            But production continues to be botched by governments in Canada, and this season there was a shortage of one type in the US.)

  5. With C-19, I would say Ryan is more exposed not less. All inside Europe and its going like Wildfire (and rife target due to refugee camps you can cancel like sports events)

    And when do other countries start to cut flight to EU? I mean its now an epicenter of infection and spread (US trying )

    China on the other hand ironically is trending down.

    • Agree EU will have trouble stopping the spread. Draconian measures like Cina did are harder in democracies like EU countries & the USA. Lots of travel between EU and Africa as well, so a big risk of it hitting countries with poor health infrastructure.

      If African countries are smart they’ll start shutting down flights to the EU now. Some of the world’s most profitable routes are run by EU airlines to Africa. Another hit.

      • I was reading some of the Chineese measures.

        While some were truly draconian, others were the ability to order resources. A lot of you will do this work orders.

        I was amazed at MRI access, here, they take xray and days latter MRI, we simply do not have the number of MRI available, swamped would be the word

        Aggressive tracking , enlist large numbers to do so

        Isolating whole areas of hospitals into free zones that were all fever related.

        Massive testing an kits that acualy work available (US is beyond pathetic)

        Waiving of health care costs to those that done have it so pole had no financially issues with getting treated (whole new meaning to Health Care for All to Protect ALL)

        All assembly of people shut down. No more rallies, no more sports, no more………..

        No Denier in Chief.

  6. I suspect US will be next. Several cases of unknown origin mean the spread is intracable, 60? million uninsured in a country with high healthcare costs is like an underground pipeline ready to spread it around the country. I hope I’m very wrong about this but I see a big risk.
    US airline industry is currently very strong but given the country’s position in the global economy I’d expect all Larin American & Canadian services to be affected. Given recent news I wonder how long before BA production is effected as well, and AB isn’t immune either. It could end up that deferals and production constraints, esp in the supply chain, cancel out. Balance sheet will suffer though.

    • You are correct. The US is more akin to Iran where denial at the top is going go hit us severely.

      5 dead in one Waxing State nursing home.

      Statements like “No one knows this stuff” when in fact, yes they do, and very well, you just refuse to listen.

      Vaccine will be a year away and there is nothing you can do about it other than start sooner. Oh, and don’t send unprotected worker to bring people back and then scatter than all over the country via closed aluminum tubes.

      State and Local ops are aware but they need national resources and we arn’t going to get that for some time.

      • One piece of good news, the US gov. is thinking about paying for treatment of uninsured. While it might already be too late at least somebody is, um, thinking about waking up.

      • In fairness, the cruise ship was a petri dish and more than 700 became infected out of 3700 aboard, which is a larger rate than would have occurred naturally.

        There were 14 positive passengers on the plane with no symptoms, out of 328. They were isolated in one section with separate medical staff and crew tending them.

        After arrival in the US, the positive number has since increased to 44, but due to the incubation period there is no way to know what the effect of the transport was. The positive rate is similar to the ship so that may indicate infection was already present, but not detected.

        So far about 10 people out of the 328 have become ill and transferred to hospital, the others are either still in quarantine or recently released, after not becoming ill. No one from the 328 has died.

        Some states are seeking to maintain the quarantine longer, to prevent those people from returning home, after 1 person tested positive after release.

        The wisdom of the transport can be debated, and the CDC obviously was not in favor. But I get the perspective of those testing positive, that coming home would be preferable, if it was handled well, which from all appearances it was.

        This also serves as an example of what to expect. You had 328 persons immersed in very infectious conditions, for which 44 have tested positive, 10 have become ill, with no deaths. These are healthy people with healthy immune systems.

        As with all viral infections, the real danger is for those with compromised immune systems who might not be able to fight off the infection. They are the ones most in need of protection.

  7. I’d say Virgin Atlantic should also be marked red along with SAS, Norwegian and Tap. Their metrics a no better than SAS’. AF-KLM are right up there too. A 1% profit margin is razor thin and their debt2equity ratio is high too.

    • Looking at numbers, you make valid points. However, 29% of AF-KLM is in the hands of the French and Dutch Governments. I doubt they would let the group fail given France’s bailout record. Regarding VS, they have the Virgin Group and Delta as shareholders. They would more likely than not recapitalize if necessary (Delta cannot afford to lose the partner in the London market).
      Having said that, they could definitely run into serious trouble. Time will tell.

      • But likewise SAS is partly owned by the Danish and Swedish governments with 14.24% and 14.82% respectively*. That is 29.06% in aggregate, not very far from the 29% you quote above for AF-KLM. (Without knowing I would guess the 29% has something to do with a EU regulation regarding state ownership).

        And regardless of ownership, the EU has (very) strict rules regarding state aid, as outlined in articles 107-109 in the Treaty on the Functioning of the European Union:
        Treaty on the Functioning of the European Union

        And regarding VS, I would not assume anything… in my line of business we often sat that “assuming is the first step towards hell”.

        * An extremely quick googling to obtain this info

      • Bailout record for France: Would you please provide figures about this affirmation ? I dont think so
        This IS why US companies buy a lot of french aerospace business.

        Keep in mind dutch gouvernment bought 14% of AFKLM group last year.
        Germany is also very protective

      • Dutch government would use any bailout to break up KLM from Air France.

        • Dont think so . KLM wouldnt survive on its own against the European heavyweights who can use Amsterdam as a base under EU rules

          • Why would KLM have to be on it’s own?
            They could stay in sky team and continue code sharing with Delta.

            I don’t see a political majority in the Netherlands for bailing out KLM if things stay the same between Air France and KLM.

            Why do you think they went behind the back of the French and they “secretely” bought the shares?

          • I forgot to add: how can any airline start using Amsterdam as a base if it’s pretty much impossible to get more than a few slots there?

    • Virgin Atlantic is only using widebodies. How should that work if they use widebodies on short routes which the A321 could do too.
      There is a reason no other airline listed is doing this.

      Interesting is Virgin Atlantic is using 787-9 but then ordered A330-900. Why did they do this.

  8. Looks like Flybe is finished. Didn’t take long for this article to pan out.

  9. Actually SAS profit margin was 2,5% in 2019 and 5,4 in 2018.
    0,5 must be a very old figure.

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