European airlines could be forced to merge if the coronavirus crisis lasts

European airlines could be forced to merge if the coronavirus crisis lasts much longer, according to a senior analyst.

Mark Manduca, associate director of Europe, the Middle East and Africa research at Citi, said Europe’s six biggest carriers were burning through cash at an “astonishing rate” as businesses and consumers cancel travel plans, which could hasten dealmaking in the industry.

“The lack of visibility is unprecedented,” Manduca said. “This is an industry that doesn’t tolerate revenue shortfall. We could see consolidation start to take place as airlines struggle to cut costs fast enough to keep up with the fall in revenue.”

A three-month shutdown would inflate Air France-KLM’s net debt to 7.7 times earnings, and increase Lufthansa’s multiple to 12.4 times, Manduca estimated.

Airlines globally are being pushed into emergency cost-cutting measures to protect profits amid plunging passenger numbers. These include grounding flights, cutting routes, and implementing hiring freezes. The International Air Transport Association has said the industry could take a hit of up to $113 billion from the disruption.

Air France-KLM AF, -4.89% on Tuesday became the latest to reveal the extent of the damage from the spreading virus as it reported a drop in group passenger numbers for February compared with a year ago.

The Franco-Dutch carrier said the coming months will be “more impacted” given the expansion of Covid-19 in other parts of the world and the extension of capacity reduction. Shares in Air France-KLM, which have fallen 44% in the year to date, were trading up 5.10% at 11:45 a.m. GMT.

Air France-KLM has substantial gross cash on its balance sheet (€3.7 billion at year-end) and €1.8 billion of committed facilities (combined, about 20% of revenues), although its financial position is not as strong as its peers, analysts at investment bank Liberum said.

Business travel, the most lucrative part of the industry, has been severely hit as some of Europe’s biggest companies ban or restrict travel for employees and major conferences are axed.

Nestlé told more than 290,000 employees to suspend all international business travel until March 15 and requested that all domestic trips be skipped whenever possible for now. Last month, the cancellation of technology conference Mobile World Congress cost Barcelona an estimated $546 million in lost revenue.

“There is going to be lasting damage done to the airline sector-consolidation in European short-haul will accelerate,” said Neil Wilson, chief market analyst at trading platform Markets.com.

European airlines were already struggling with profitability before the coronavirus outbreak, as they grappled with rising fuel prices, excess capacity, and intense competition from low-cost carriers.

Compared with North American airlines, the European aviation sector is more fragmented and less profitable. However, attempts to build scale and cut costs through mergers have been impeded by political and regulatory obstacles.

Of the roughly $7 billion of net profit that the European carriers made in 2019, the lion’s share was held by the top six carriers. “In fact the bottom 35% of the European short-haul market broke even or lost money; a fairly sobering fact…and one can but ponder as to the state of these very same balance sheets,” Manduca said. www.marketwatch.com