IS THE SIZE OF THE AIR COMPANIES THE GUARANTEE OF SUCCESS?

April 24, 2022

?I am struck by the willingness of the airlines to become bigger, in other words to get such a size that they would have their survival assured. In the event that they fail to do so, they seek to rely on another carrier. The common reasoning is that as markets have become global, if a carrier cannot offer its potential customers a sufficient offer, they will then go to their competitor. In short, the bigger you are, the more beautiful you are. Is it so safe?

?The biggest airlines are undoubtedly the 3 American majors: American Airlines, Delta Air Lines and United Airlines. These huge groups were built by successive takeovers and mergers. And the results are there. They are the first to emerge from the dark period crossed because of Covid. They will probably post very good results this year. This argues for the value of reconciliations between carriers. Only this is to forget that the 3 groups mentioned have all gone through the Chapter 11 phase, the more flexible equivalent of the European bankruptcy filing. ?This system has enabled them to restructure massively. In fact, all major American operators have gone through this procedure with the notable exception of Alaska Airlines, notoriously smaller than its competitors and Southwest Airlines which remains the low-cost ?model.

?The South American market is no exception. The two largest groups: Latam and Avianca had to place themselves under the protection of the American Chapter11. As for Varig, the Brazilian flag carrier, he simply fell by the wayside.

?In Europe the situation is somewhat identical. British Airways only got out of its difficulties by reducing its operations by 30% before regaining excellent health and creating the IAG group which still faces important concerns, if only by the conjunction of Covid and Brexit, excuse the little. Air France/KLM has not been able to achieve a decent result for years. In fact, once the operational beneficial effects of the merger between the French and Dutch companies had passed, the difficulties accumulated and without the considerable support of their respective governments, the group would not have survived.

?On the other hand, these operators of much more modest size, are doing perfectly well. The best example comes from Singapore Airlines. This company was founded in 1937 as Malayan Airways, when Singapore was still under British rule. After the war and the short-lived federation between Malaysia and Singapore, the island state gained independence in 1972 and the company then took the name Singapore Airlines. It is based in a country that does not have a market that can provide it with a sufficient economy. It was therefore forced to find a clientele outside its territory of origin. To do this, it has focused on quality rather than volume. It has become a benchmark in the care of its customers and has obtained airport facilities that match its ambitions. This is very similar to the situation in Emirates and Dubai.

?And the results are there. Since 2000, the company has experienced only three years in operating loss: 39 million Singapore dollars in 2009/2010 or 26 million euros, 212 million Singapore dollars in 2019/2020 and of course 4,270 million in 2020/2021 or 2.8 billion euros. We will have to forget one day these two catastrophic years to analyze the fundamentals of air transport. Still, the Singaporean carrier has generated comfortable results, of the order of 350 million euros on average for more than 20 years, all with a size much smaller than that of large groups: a turnover of around 11 billion euros in a full year compared to the 25 billion euros of the Air France/KLM group.

This is not the only example. Closer to us Air Cara?bes with a very modest size compared to other international airlines, is doing perfectly well while Corsair is struggling with a size about the same.

?So, one wonders why ITA, the new Italian "national" airline is desperately looking to get closer to another carrier. It risks losing its personality and culture and yet we know how important these values are for Italians. You don't have to be big to be distributed and marketed globally. There are many possibilities, including commercial and operational agreements with selected partners. Desperately looking for a shareholder, ITA may foolishly miss its entry into the markets.

?Small operators have at least the same chances of prosperity as large ones. That is still comforting.