The Future of European Legacy Carriers

Opportunities and Challenges 2017

In January 2016 jet fuel was priced with just under 40 USD/Barrel. Considering it’s 2011 high with about 140 USD/Barrel, the rate has plunged about 70 % since then. Only because of this beneficiary market externality, some carriers were able to make profits. However, there is no doubt that the European aviation industry continues to become more and more competitive year by year.

On the one hand, Low Cost Carrier (LCC) continue to gain strength in the domestic market. On the other hand, the growth of the gulf carriers in the intercontinental traffic seems almost unstoppable. On top of that, both LCCs and gulf carriers have significantly increased their offered seat capacity, created overcapacities caused the deterioration of yields.

In order to keep up with economical requirements in the long run, most airlines are under pressure to constantly optimize their cost structure. In particular, traditional legacy carriers with a high proportion of labour costs and overheads are asked to improve their disadvantageous situation by implementing austerity measures.

Apart from that, state of the art smart data technologies allow airlines to analyse and address customer specific needs and offer their passengers dynamic and personalised products overfulfilling their demands resulting in higher revenues.


The aviation industry is chasing records. According to the International Air Transport Association (IATA) more than 36,6m scheduled flights and more than 3,7 bn. passengers were forecasted for 2016. Considering an operating profit of almost 60 bn. USD and an operating margin of 8.3%, the aviation industry continued it’s 2015 growth, which in itself already was one of the most successful years in history.

The Market Environment of European Legacy Carriers

One of the main drivers of the above described growth path is the development of LCCs. On the one hand they continue to expand their capacity and on the other hand penetrate the markets with aggressive pricing. But whereas in the past they only focussed on secondary airports offering cheap air fares, they today withdraw from regional bases and target primary, urban airports instead. This strategic decision clearly marks a paradigm shift compared to their traditional set up.

The crowding out of Swiss in its former hub Geneva by Easyjet or the market entry of Ryanair – the market leader in the European LCC segment – at Frankfurt’s Rhein Main Airport, which at the same time functions as Lufthansa number one hub, are just two recent examples that demonstrate the beginning of a new era in the European aviation market.

The intercontinental traffic however is mainly dominated by the big players from the middle east, which steadily set new standards in service. Qatar for instance just lately introduced a newly developed and simply stunning Business Class on the ITB. Yet besides offering a state of the art on board product, the gulf carriers also continue to widen their networks and simultaneously increase their frequencies to existing destination. In order to complete the picture of the European aviation market, one also has to mention that there are a few LCCs intending to setup a profitable long-haul business. However, comparing the more than 55,000 weekly flights of LCC within Europe during the summer schedule 2016 to little less than 100 weekly LCC flights heading off for intercontinental destinations, it has to be acknowledged that LCCs currently only have a very minor share in the intercontinental market.

Challenges and Chances of European Legacy Carriers

The outlined market environment clearly demonstrates that the business model of the traditional European legacy carriers is attacked from two ends – both the continental and the intercontinental traffic is challenged by increased competition.

Thus, to remain competitive in the long run, there seems to be no other chance for traditional carriers with rigid hierarchies as to consequently reduce the cost of production. Yet, while doing so, the challenge is to solely focus on internal processes and not to threaten the customer value proposition.

Considering these circumstances, mergers and acquisitions seem to be a promising option to improve one’s strategic positioning. They not only offer the involved parties an advanced revenue and cost situation through the realisation of synergies, they also enhance the customer value by giving the passengers access to a wider range of offers. Notably there used to be more than 120 airlines in the US aviation market about 20 years ago, whereas today less than 50 players form the market.

Apart from the ongoing market consolidation in Europe one can also observe an assimilation of legacy and LCCs business models. Legacy carriers have unbundled their fares (cf. that even base fares used to be inclusive of free checked baggage) and today make additional profit through the sale of ancillary services. Yet LCCs begin to set up frequent flyer programs, aiming to bind more valuable business travellers.

Should this trend continue, legacy carriers have the chance to precisely position their brand in order to set themselves apart from the competitors and stand out of the crowd. Not only will this support the retention of existing customers but it will also attract new ones. Doing so however essentially requires to consequently improve and promote one’s own value preposition.

Yet, instead of copying the competitor’s business activities, airlines are best advised to exceed customer expectations by efficiently using smart data technologies and generating customized offers along the entire customer journey – before, during and after the flight.


The aviation industry will most likely remain to be highly impacted by external factors and thus reside very volatile in its annual profits.

Apart from that, some market imbalances will possibly remain unsolved. As such, both the subsidisation of the gulf carriers, which according to the political policy of their local governments have to pay little to no taxes, and the acceptance of questionable LCC employment relationships by the EU seem to be unfair and highly questionable.

However, as long as the European legacy carriers focus on their strength while constantly improving the integral value proposition for their customers – with particular focus on their status customers – there should not be too much worry that British Airways, AF/KLM, Lufthansa and Co. will not participate from the positive industry forecast predicted by the IATA for the years to come.