As goes Austrian - So will go many other carriers UNLESS they change.

Austrian has lost its independence. it is now firmly a part of the Lufthansa group of companies. Are there lessons here for other airlines? Who is next for the spotlight, Aer Lingus, SAS Scandinavian Airlines,  Japan Airlines? Is the consolidation inevitable? This analysis tries to address these  fundamental questions

Many believe that consolidation in the airline market is the only way to survive. I beg to differ. I firmly believe that the issue is that airlines have become so used to the legacy and ossified structure that its either feast or famine for these companies. Since they spend large amounts of time in famine (more so than in good time) there is safety and survival in that the larger they come the less likely it will be that their home governments will let the airlines fail.

This logic has driven airline thinking amongst legacy carriers for a very long time. It is time for this to change. I believe that certain airlines particularly those which are LCCs have shown that it is possible to develop both a annual cyclical model and an economic cyclical model. One can look no further than Ryanair to see how they take on seasonal staff and are unafraid to park aircraft in the winter months. 

In my opinion therefore the premise that airlines are large immovable objects really doesn't have to hold sway. There is enough blame to go around. The labour protectionism is enshrined in many collective bargaining agreements. Airlines are particularly sensitive to union pressure as labour has the ability to disrupt operations easily. However lest you think I am anti union - far from it. The airline managements don't want to stress themselves out to actually plan and manage for this eventuality.

When one looks at Austrian - it becomes clear that in its current fragile state it has little option but to address its cost structure through radical surgery and large scale layoffs. The roots of the problem lie in many different places but all of them were at worst avoidable - at best preventable. Therefore one has to conclude that the resulting merger with Lauda Air created a big sick airline from two medium sick ones. The merger was never fully thought through and executed. The good times came along and everyone was happy - full planes - lots of revenue - who cares about yield and costs! In my opinion with the benefit of hindsight they could have adjusted earlier with far less pain.

If we look on the current landscape there are several airlines that have fallen victim to the same set of issues that befell Austrian. Specifically SAS and Aer Lingus are the most likely candidates. But it is not just small/medium airlines - big ones too can find themselves in the same predicament. Specifically JAL.

By now it should be obvious that governments don't necessarily have the desire nor in many cases the ability to bail out these legacy carriers. Think Brazil, Belgium, Switzerland and many smaller nations.

The lessons here converge. One can no longer accept the conventional wisdom that consolidation is inevitable. Consolidation does not guarantee survival. The expectation of government handouts and bailouts has in recent years receded quite dramatically. Airlines need to radically rethink their business models. if there is no other lesson learned from the recent GFC it is that agility and flexibility are far more important than the vast majority of carriers currently believe.

Ignore this advice at your own peril.

Timothy O'Neil-Dunne consults with leading institutions through GLG