What's Next For Europe's Airlines?

0:09Edmond Rose: Hello and welcome to Window Seat, Aviation Week's Air Transport Podcast. I'm David Casey, Editor-in-Chief of Roots. Welcome aboard. Well, it may be holiday season for many, which can be a traditionally quieter period for aviation news, but there's been no shortage of big stories across Europe in recent weeks. In this episode, we'll take a closer look at some of those developments and consider what they mean for airlines, airports and passengers. Now, one of the biggest stories over the summer so far is EasyJet's agreed takeover by US private equity firm Apollo Global Management, raising questions about what private ownership could mean for the airline and Europe's wider competitive landscape.

0:50Edmond Rose: Elsewhere, AirBaltic is shrinking its A220 fleet and seeking fresh financing. Europe's largest airline groups are slowing their capacity plans as fuel costs remain high because of the Middle East crisis. And the European Commission has proposed extending its emissions trading system to more international flights. Elsewhere, passengers are also facing lengthy queues at some airports as the EU's new biometrics border system struggles with the summer peak. So joining me to discuss these developments and the wider outlook for the European aviation market are some familiar faces and some familiar voices.

1:25Edmond Rose: We have Victoria Moores, European and Africa, Eurochief at Air Transport World, Edmund Rose, Consulting Director at Aviation Consultancy ASN, and Rich Maslin, Head of Analysis at CAPA, Centre for Aviation. So Victoria, Rich and Edmund, welcome back to Window Seat. So let's start with EasyJet then. When we last spoke about the LCC on the podcast in early July, the US firm Castle Lake appeared to be in poor position to buy the company. And at the time, it was the only potential bidder. However, since then, EasyJet has agreed to Apollo's offer of£7.15 per share, which values the airline at about£5.7 billion or US$7.7 billion.

2:09Edmond Rose: Now that has the support of EasyJet's board and founder and Castle Lake has now withdrawn from the process. So Victoria, can you bring us up to speed on what's the latest with this? Why has EasyJet switched its recommendation from Castle Lake to Apollo and what now needs to happen before that takeover can move forward?

2:29Richard Maslen: Yeah, so what we saw, David, was we saw this unanticipated Castle Lake approach to try and take over the whole of EasyJet. And as a reminder, EasyJet is a very significant airline in Europe. I think it ranks number two in terms of seat capacity in Europe this summer. They've got a fleet of nearly 360 aircraft, around about 1 ,200 routes. So we've got a sizable airline. So anybody coming in to try and take over EasyJet has got to have some firepower behind them. At the time when Castle Lake approached, EasyJet shares closed the day before at£3.94. And what we saw was Castle Lake progressively increased their bid five times and ultimately did get recommended by EasyJet.

3:16Richard Maslen: And then all of a sudden, we saw Apollo come in, which is another US investment company. Apollo came in straight with a£7.15 per share offer compared with the£6.90 offer from Castle Lake. But I think that the two significant parts here are the fact that there was speculation, and I'm going to stress it was analyst speculation, that Castle Lake might consider breaking apart EasyJet. Whereas Apollo, looking at what they've got in mind for EasyJet, it seems very much that they'd want to continue the airline's growth strategy, to really continue the development of the business as is, albeit likely delisted from the looks of the offer.

3:58Richard Maslen: I think that the second significant thing about this is the fact that EasyJet's founder, Stelios Haggiano, he is in support of the offer. And I think that that in itself was one of the key factors. It was absolutely guaranteed that Stelios and his family would retain their shares and then participate in this latest round. So with that in mind, they recommended it to their shareholders and we're in a bit of a wait and see process. Hopefully the process will complete by March 2027. But obviously there's all the various regulatory hurdles to go through yet. But yes, he's yet very much switched from supporting the Castle Lake bid over to the Apollo bid and Castle Lake's now out of that process.

4:40Richard Maslen: But it will be a huge shift in ownership of European aviation, essentially for us in terms of coverage. Privately owned companies don't have to disclose as much as listed companies. So that could shift our visibility over what's going on behind the scenes at the company. But certainly a big moving story to watch over the coming months.

5:00Edmond Rose: Absolutely. So it is moving forward, but I'd say there are some important regulatory questions around the deal yet in terms of the ownership and control, especially with the European Commission planning to review airline ownership rules later this year as well. So the debate about that is not going to go away. Now, Rich, EasyJet, as Victoria said, it's a very strong brand, has valuable slots at constrained airports, substantial airbus order book, but its shares have underperformed and its costs remain considerably higher than the likes of Bryona. What has made it such an attractive target for private equity?

5:36David Casey: Thanks, David. Yeah, I think Victoria summed up a lot of it there when she mentioned about the share price. You know, it's quite clear that the share price that EasyJet has at the moment is a lot lower than what you would expect it to be. As a business, you've got a very recognizable European brand. You've got a large, relatively scarce portfolio of slots at airports where access is difficult to replicate. The enormous Airbus order book that's there. And you've got a growing holidays business. And they're valuable assets to any kind of business. You mentioned about Ryanair. there's a fairly obvious gap between EasyJet and Ryanair where they are.

6:11David Casey: And you could think perhaps that the earning opportunities for EasyJet are a lot stronger under Apollo when the deal is concluded, if it is. The comparison with Ryanair is difficult because Ryanair has relentlessly pursued post-discipline aircraft utilisation, while EasyJet has had a slightly different business model looking at serving more expensive airports, looking at a bit more in terms of regular schedules rather than occasional flights during a week so it's complex to compare them directly you could question why as a low-cost airline when you're trying to minimize cost as much as you can would you say that easy jet was being run very differently it's they've adopted a very different business model to other low-cost airlines and that sets them apart very seriously and i think that's what apollo sees as the opportunity there And I think when you get private entity equity getting involved, you know, you're not looking at necessarily reinventing the airline.

7:10David Casey: A lot of people may think that's the case. Basically, now it's going to be a case of delivering higher returns. So there is a return on this investment Apollo's making. So if you can improve the cost space a little, extract more from the fleet, increase ancillary revenues further and grow the holidays and loyalty businesses. Obviously, EasyJet is looking to launch a new loyalty program. That will be a very interesting opportunity there. You're not going to need to double the size of EasyJet, turn it into a super business to make this investment work. I think that's probably the most interesting part of this transaction.

7:43David Casey: It's the opportunities less about buying growth, but rather buying under-realized value that's already there within the business.

7:51Edmond Rose: So it's not necessarily about making EasyJet bigger, but it's getting more value at the business that already exists. Let me bring you in here, Edmund, and talk a little bit more about the network. As we've said, EasyJet's focus on primary airports gives it a really strong position that is difficult for competitors to replicate. But those airports are obviously more expensive to serve. And they probably explained some of the cost gap between EasyJet and Ryanair. Do you expect Apollo to push EasyJet towards more lower cost airports and markets? Or do you think the network strategy will be similar or the same as what it is now?

8:27Victoria Moores: If we take what Apollo has said as read, and they have said that they want to keep the existing management team strategy, and they want to essentially develop what is happening, including things like the loyalty program that is imminently going to launch, we're told, and optimize the network, I just do not think it would make sense for them to go charging off into a lot of different types of market. Coming back to the cost point, yes, the primary airports carry higher costs with them. But I suspect there are other areas of easy jets costs which are also high. And unless you can radically cut those, you're not going to be able to make that switch into more of the non-primary airport markets.

9:24Victoria Moores: So I think two things that we see, the loyalty program coming up and costs, suggest they want to carry on with the more premium focus. And that means the primary airports. One of the points is it's quite hard to imagine them, for example, coming out of those positions they have at the primary airports, the constrained primary airports like Amsterdam and Linate and Gatwick, because it's quite hard to, for example, find somebody else who's going to take it over and provide you a monetary sum for doing so. and selling off slots piecemeal might make you a bit of money, but you're effectively selling your ability to earn the premiums that EasyJet earns.

10:12Edmond Rose: So from a consumer's perspective, then probably not much will change with the network. Is that fair to say?

10:20Victoria Moores: Exactly. I wouldn't expect significant change. I do wonder if for a period they will be more cautious about some of their network changes and focus on making the most of what they have. But let's see.

10:39Edmond Rose: Okay, well, moving on from EasyJet now, let's turn to a different European airline, which is facing a very different set of challenges. Now, that is Baltic, the Latvian state-controlled carrier, and it's the largest airline in the Baltic region. until recently it was pursuing a very ambitious growth strategy and ahead of a planned IPO it was aiming to build 100 aircraft by 2030 it's now sharply scaled back those plans and under its revised business plan it wants to shrink its fleet from 54 aircraft to about 36 by the end of this year now Victoria tell us a little bit more about what's happening at AirValtic why exactly is this approach being taken and how has it reached the point where it really needs to cut back on its fleet and its network?

11:27Richard Maslen: I think to understand the situation at Air Baltic you need to cast the clock back a bit so historically they had a multi-aircraft fleet under the leadership of former chief executive Martin Gauss he consolidated that fleet to make it all A220-300s so you move from this variety of aircraft to try and make it as efficient as possible under one aircraft type. And he saw that the airline needed to grow to make it sustainable, to bring down unit costs. So he came up with this plan to expand to 100 A220 300s by 2030. That included the scheduled flying and also ACMI work for other airlines. The challenge is that by moving to that single fleet.

12:12Richard Maslen: There was a dependency on that single fleet. We've had the Pratt & Whitney powder metal issues with the engines, which caused a lot of disruption, particularly as that was the sole fleet for Air Baltic. They were particularly hard hit by that. On top of that, you've had the conflict in Ukraine, which caused them to have to pivot their strategy. You've had more recently the unrest in the Middle East, demand issues, and all of that knocks through onto the bottom line. So what we've seen them doing is they've had to, since Martin Gauss's departure, they've revisited that strategy. They've come up with this revised business plan, which really does scale down those growth ambitions.

12:52Richard Maslen: And they are looking for immediate interim financing. They've had to renegotiate with their bondholders. They did mention at the time when they were announcing the results of their bondholder discussions, this ensures the continuation of AirBaltics operations which to me really does show that this is a tight liquidity situation they've got a bit of breathing room through until November the question is whether or not they're going to be able to secure that interim and longer-term financing over the next few months.

13:23Edmond Rose: As part of that retrenchment they've said they're going to concentrate more on their meager hub so that means pulling back in some other markets where they've expanded in Estonia, Lithuania, Finland, for example, and they do some seasonal flying as well to the Canary Islands with some seasonal bases there. Edmund, what do you think the retrenchment will mean for AirBaltic's network, Riga's position as a hub, and connectivity in the wider Baltic region? Do you expect it to create opportunities for Ryanair and WIS, for example? Is this the right move for AirBaltic as well at this time?

13:57Victoria Moores: So the obvious thing for them to do is to retreat more into the flying out of Riga. It's their principal base. It's where they're registered. And it is also providing a bit of a hub. They carry quite a lot of connecting traffic over Riga. So perhaps a bit of doubling down on that. as Victoria mentioned, the war in Ukraine has deprived them of what was previously more of a hub opportunity from Russia, between Russia and the Nordics and indeed into Western Europe. So that's not coming back quickly. As far as we can tell, there's no great progress in the ending of that war. So for AirBaltic, they'll have to focus more on their Riga hub, in my view.

14:55Victoria Moores: But you mentioned the operations they have in winter from other places. That, of course, is part of the same problem that every airline in Northern Europe faces, is that you get less opportunity, particularly for leisure traffic in the winter. And some of the flying that Air Baltic has been doing for the winter and has in the schedule for this coming winter may look a bit unusual because it's to particularly from the Canary Islands to other places in northern Western Europe. But if you're going to try and use your fleet properly, then that's what you need to do. So I don't know that that's all going to disappear.

15:38Victoria Moores: It is a way for them to manage the seasonality. and seasonality was a big problem with their wet leases so their Lufthansa group agreement has I think only five aircraft on wet lease in the winter so they're trying to tackle several problems at once but one of them is seasonality and with Riga as a hub maybe they have more of an opportunity by doubling down on Riga to sort out some of that seasonality.

16:08Edmond Rose: Looking at some other European carriers. We've had a number of financial results in recent weeks. We've heard from the likes of Lufthansa, who has dropped plans to increase capacity by as much as 2 % this year and is considering more cuts to its short-haul network. IAG has also moved from growth, I think, from under 3 % to broadly flat capacity. And Air France KLM has also lowered its growth forecast this year. Rich, taking the market as a whole, how would you characterize the health of the European aviation market this summer? Is this a pausing growth from some of those carriers or do you think airlines are becoming more cautious for the longer term?

16:49David Casey: You say pause, I think pause probably is the right word for it. It's not a big seismic change but this is a fairly revealing development as we are. You know, it's a strange situation to be in because as we look currently, if you're to believe all the headlines, you know, airlines should be struggling ridiculously, you know, European aviation should be at the floor with everything that's going on, you know, it is performing remarkably well, you know, we have a really strong European aviation industry. And I think that's, that's where the complexity comes into it. Now, we have to remember, we have a healthy industry, I've been on numerous flights over the last couple of months for our events, and every single one of them has been full.

17:32David Casey: and the fares that I'm paying for most of the tickets are probably 20 % more than what I paid last year for the examples that I have. So, you know, we're seeing a strong demand and also a strong yields for airlines. So that's really sort of helping them, saying that the cost of fuel has made a big impact on these airlines. So I think where we are, the results from Air France, KLM, Lufthansa and an IAG, they're probably what we expected, but we may have thought that they would actually be a lot worse than they were given the impact that the operations from February to sort of even still today, you know, they've been protected by the hedging, you know, they're quite highly hedged all three groups around the 70 to 80 % of their fuel costs.

18:22David Casey: So, you know, that's offset a lot of the additional costs that they're facing from fuel. So, you know, that will change moving forward. And I think the longer that the crisis potentially goes on, it will have a noticeable impact on it. And I think that's the bigger concern for European airlines right now is not price of fuel and how it's changing. It's the uncertainty of how long we're going to be in this environment. Seeing some of the headlines this morning of what's the latest things between the US and Iran, you know, it's not healthy for an industry that is already facing a lot of complexity.

19:00David Casey: We do have to remember that we're still talking about growth. We're still talking about the 1%. And, you know, 1%, that's a lot of flights for these large airlines. So, you know, you can't say we're in a really bad situation of losing, cutting roots, cutting capacity in a lot of places. It's trimming capacity. It's trimming roots. It's ensuring that the aircraft are in the right markets that they're flying to, to ensure you get the best return on them. I think the distortion we have now going into the second half of the year is the first half, the Gulf Airlines were seriously impacted by what was happening.

19:40David Casey: They really retrenched their operations. You know, those big hub carriers, the Emirates, the Cicato Airways, they're building their networks back up to almost what they were before the crisis began. And so that's going to have a stronger impact on European airlines over the second half of the year. And that's something that we're going to sort of have to look closely. So I think we have to be even more cautious in the second half than what we've seen in the first half. I think from the industry perspective, I would say European aviation is healthy, as healthy as it could be in the circumstances.

20:11David Casey: And I think what it needs to do now is just rediscover the difference between passenger growth and profitable growth, because that's ultimately where we need to be moving forward.

20:21Edmond Rose: So certainly not a lack of demand than we're seeing, but it probably means that airlines have got less room for error than perhaps previously. When you think about the network then, Edmund, obviously when fuel prices rise, airlines become more selective about how they deploy that capacity. How is that affecting network decisions? Are you seeing that playing out? And what airports or routes or markets are most vulnerable to any rise in that fuel price?

20:48Victoria Moores: The obvious answer is that new routes that are untried and untested are the ones that are most vulnerable. So if I'm working for an airline in network planning and I'm worrying about uncertainty or high fuel prices, I'm more likely to be conservative and not go for something untried and untested. before I leap into something new. I want to be sure that it's going to be better than something, some route I already have, and that's hard to prove.

21:22Edmond Rose: Let's turn now to an operational issue affecting passengers this summer, which is the EU's new entry exit system, or the EES, which replaces passport stamping for short-stay visitors from outside the EU, including from the UK and the US, with a digital record of when they enter and leave the Schengen area. Now, passengers must provide passport details, facial images, and fingerprints. And the overall aim is to strengthen border security and identify people who potentially overstay in the block. Now, Rich, I know you've had experience with this. What has the EES rollout looked like across Europe this summer?

22:00Edmond Rose: You've probably seen the best and the worst of the system, haven't you?

22:04David Casey: Yeah, I think I have, to be honest. As I said before, I've traveled quite a lot and I've had a mixed experience. I think, again, we have to remember here, there have been some real horror stories of people trapped in airports, missing flights. But there's also been the positive stories, which you don't hear about. So we have to balance them up quite clearly between the one or two really negative stories and probably the hundreds where everything has gone fine. I think the interesting thing about this isn't the technology itself that's been introduced. It's the whole complicated European border architecture behind it all.

22:41David Casey: So, you know, I've had examples where I've transited through a major hub airport in Europe and it's taken me 30 seconds. Used the machines, got through, been perfectly fine. I've had others, and it's particularly when you have a short connection of 45 minutes. But I've been stuck there for 45 minutes waiting to get through. And then when I got there, literally 30 seconds, I'm through. So, you know, it's just a volume issue.

23:05Edmond Rose: but the thing that worries me is something I've seen just quite recently is the technology may be

23:11David Casey: failing to communicate between one country and another country's system so you know I fell into that hole just recently when I arrived in Amsterdam one evening before continuing on to Frankfurt where I stayed the night so the following morning I was flying off on a long haul flight from Frankfurt to Vietnam and I got to the border and unfortunately they wouldn't let me through because they said, unfortunately, Mr. Maslin, you haven't arrived in Europe. And those weren't the exact words. They were a bit more forceful than that. But, you know, and I was in shock and I was a bit uncomfortable with it all.

23:44David Casey: And it actually took about 30 minutes. I actually got to a stage that I was feeling really uncomfortable because they were forcing me to prove that I'd flown from the UK into Europe. And this was no fault of my own. I'd used the machines correctly in Amsterdam. but unfortunately the system there hadn't updated for the German system the following morning. So it's just, you know, I thought, okay, this has got to be an isolated issue. And I went on to speak to a few people in the industry and actually it's been quite common, especially among business travellers. But, you know, back to the serious issue here.

24:19David Casey: For aviation, this is all quite uncomfortable because, you know, from the passenger perspective, they don't see this as a European policy initiative. They see it as, why am I stuck here in a queue? For airports, it becomes an issue in terms of managing these queues, space in the gates and terminals to ensure they can handle all this. They're losing quite a lot of revenue as well in terms of spend within the airports. The passengers are potentially stuck at border posts rather than actually in terminal buying food and drink.

24:51Edmond Rose: Well, if the EES is providing an immediate operational challenge, another story that we've seen making the headlines recently is the proposed EU emissions trading system which is a longer term cost and competition issue for airlines. Now Victoria I know you've been writing a lot about this for the next issue of ATW magazine. Before we end this podcast I'm sure we could probably do a complete separate podcast on the ETS but maybe just recap what the Commission is proposing and why it's managed to attract not only criticism from airlines, but also from environmental groups as well.

25:29Richard Maslen: Yeah, it's quite special that the Commission appears to have managed to upset everybody with this one. Like you say, the environmentalists and the airlines and even the airlines that technically benefit slightly from this. So let me run through briefly what the changes are. So from 2029, the EU is proposing that the EU emissions trading system should be extended. At the moment, it's just intra-EU. They're suggesting that it should be extended to include departing flights within a 5 ,000 kilometre range of the centre of the EU, which is actually Frankfurt Airport. That's where it's going to originate from, which is quite an interesting choice in itself.

26:13Richard Maslen: This means that Middle East flights, So hubs like Dubai and Doha would be included within the ETS. Also, Turkey would come within it as well. Basically, what we're seeing is, obviously, the Arab air carriers are not very happy about this change. Clearly, the Commission is looking to tackle some what they call carbon leakage to make it so that airlines can't just fly passengers to a hub just outside of the EU and then fly them on without any environmental levies basically taking effect against them. But I did quite like the comment from Arco on this. Their response was that this is arbitrary, unilateral, extraterritorial.

26:54Richard Maslen: It has no legal basis, environmental threshold or internationally agreed methodology. So I think we conclude they're not very happy about that. And we're hearing a lot of commentary even from the Asia Pacific Airlines, from the Latin American Airlines, which again, they won't fall within the scope, saying we really need to focus on Corsair. Taking this fragmented approach isn't the right approach for the environment. I think it's also interesting if you get a little bit deeper into the regulatory proposal itself. What we're seeing is the EU is actually proposing to slow down the rate at which the cap is tightened on emissions.

27:33Richard Maslen: So they said that basically if we carry on where on the trajectory that we're on now, it's going to mean that we're going to overshoot our ambitions. So what we're going to do is at the moment, the rate at which it is reducing is 4.3%. ultimately that's going to drop down to 1.7 % under the proposals from 2036. So I think that's quite an interesting takeaway. A couple of other bits coming up there for me is that airlines that use sustainable aviation fuels have been able to claim ETS credits so that they can offset the increased costs of their fuel. What the EU is proposing here is that hybrid aircraft, electric aircraft, hydrogen aircraft would be included and eligible to receive some of those benefits.

28:20Richard Maslen: Although the amount of support that's being offered while the overall pot of cash is increasing to make it accessible to obviously Middle East airlines will now be able to claim these benefits. The challenge is that the support for the various propulsion mechanisms themselves is reducing. I was speaking to an ESAF producer and their chief executive said at the moment airlines can claim up to 90 % of the cost difference back. Now they can only claim 60 % with an extra 10 % if the ESAF is EU produced. And I thought that that was really interesting that particularly something like ESAF that the EU really wants to ramp up may benefit under this from a little bit less support.

29:03Richard Maslen: We're also getting hints towards book and claim being possible under the new proposals, albeit under a very specific system. Contrail management will be incentivised for the first time under ETS. And also there's going to be more national revenues to be pushed into ETS sectors. So overall, it's quite a big shift. I think we're going to see a lot of pushback against the, particularly that 5 ,000 kilometre range proposal. Right now, we're going to have to be in a wait and see. We'll hear more on this as the Council and the Parliament finalise their positions on the proposals by the end of this year.

29:39Richard Maslen: They're looking to get it through very quickly in the first quarter of 2027. So I think we're going to see a lot of talk and a lot of commentary around this subject over the weeks and months to come.

29:49Edmond Rose: So it's clear that there's a long way to go before this becomes law. And I guess, as you said, the details may change and there's going to be a lot of talking between now and the coming months. So I think we've covered a lot of ground in this podcast already we've covered a lot of the big stories from easy jet baltic capacity growth ets and the the exit entry system so that is all we have time for window seats this week so thank you for listening and thanks to our producer cory hit thanks again to rich victoria and edmund for joining us as well if you enjoyed this episode make sure you like and subscribe wherever you get your podcasts but until next time this is david casey disembarking from window seats

30:35Matthew