Lufthansa's Unique Argument for Consolidation
The world's three largest airlines are in the United States. That's bad for European security, Lufthansa Group CEO Carsten Spohr said.
Airline mergers bring out the most novel arguments, don't they? As carriers seek to persuade regulators to allow them to consolidate — and, let's be honest, to eliminate competition — they create unusual talking points to get deals approved. We've seen this recently from JetBlue, which has shared arguments that convey "more than a hint of desperation," according to Axios, about how it cannot compete nationwide without absorbing Spirit. 'Our business is screwed' is not a great line for investors, but for JetBlue and Spirit, it may work in court.
Lufthansa Group hasn't gone that far, but I was amused by two arguments executives made last week about why they must absorb ITA, the troubled Italian airline. First, they say, they will be the savior of the Italian traveling public, bringing competition (and lower fares) to a market dominated by low-cost carriers. Think about it: Carsten Spohr wants you to believe that Lufthansa Group will keep Ryanair honest, not the other way around. He's probably not wrong, because any skirmish between the two should lead to lower fares, but it's still an unusual argument for a bloated legacy group to make.
"ITA is only, I think, No. 3 in terms of market share in Italy or actually No. 4 depending how you count it, with the low-cost carriers being the top leading carriers," Spohr said on Lufthansa Group’s third quarter earnings call. "One low-cost carrier alone has 40 percent market share in Italy, which is resulting in, I think, the highest price increases the European industry has seen anywhere in '23. I think it's obvious that this transaction will increase competition in that important Italian market."
The second novel argument is about geopolitics and global competition. Spohr argued that having three giant airline groups is good for Europe. Sure, when it comes to airfare prices, maybe having few competitors is not the best outcome. But when it comes to the continent’s security, Spohr said, perhaps bigger is better.
"Europe more and more is turning its attention toward being globally competitive in other industries — when it comes to energy, when it comes to defense, when it comes to monetary policy," Spohr said. "I think Europe and the EU Commission have understood that we need to look after European interests on a global scale."
This includes being competitive with the Americans, he said. United, Delta, and American "are already Nos. 1, 2 and 3 in our industry," Spohr said, telling analysts the European groups should not fall further behind. "The European airline groups, not just us, but also at least our two big competitors, need to grow to stay on a stable level with other global players."
I'm not as knowledgeable about European competition laws as in the United States, but I suspect many of you understand why Lufthansa Group should absorb ITA, even if it decreases competition. If I am remembering this right, every other entity that tried to turn around the Italian flag carrier has failed, including the government. Lufthansa has considerable experience fixing similar airlines, and it deserves a chance.
Now onto more items I found interesting, including a discussion on corporate travel recovery, as well as the strategy behind Lufthansa Group’s North American expansion. We learned more about why United paused its transatlantic growth.