ANALYSIS: Tough climate drives new push for Greek merger

Fresh attempts by Aegean Airlines to merge with Olympic Air illustrate the continued tough conditions facing the Greek market.

Aegean renewed attempts to merge with Olympic by agreeing a deal with the latter's owners, Marfin Investment Group, to buy a 100% stake in the unit for €72 million ($93 million). The move is part of efforts to turn round the financial fortunes of the two carriers, which posted a combined loss of €65 million last year.

It comes 21 months after European competition regulators blocked an earlier attempt to merge the two Greek carriers. In its January 2011 ruling the European Commission argued the two carriers controlled more than 90% of the Greek domestic market and there were no realistic prospects that a new airline of sufficient size would enter the routes and restrain the merged entity's pricing. It dismissed Olympic and Aegean's offer to give up slots at Greek airports on the grounds they did not suffer the congestion seen at airports in other key European merger decisions.

In its new attempt to merge, the carriers' argue their relatively small scale and the severe Greek economic crisis hits its ability to compete with other European airlines.

"Our sub-scale size, combined with the effects of the unprecedented Greek crisis, restrict our ability to successfully compete within

the European and global aviation market leading us to further losses and further reductions of size and scope," says Aegean. "As a result we are faced with the immediate danger of Greek Tourism, an industry essential for the country's recovery, becoming entirely dependent on foreign carriers with permanent losses in local employment and state revenues."

Under the proposed acquisition Aegean would continue to operate the two brands, using distinct aircraft. Aegean is an all-Airbus narrowbody operator, while Olympic operates 14 Bombardier turboprops in addition to seven Airbus single-aisle aircraft.

Over the years Aegean - which began as Greek's first private scheduled operator using regional aircraft - has grown to be the country's largest operator, while various cuts and relaunches of the Olympic operation - the latest in 2009 saw the launch of the slimmed-down, Marfin-owned successor carrier Olympic Air - has seen the one-time flag carrier evolve into a private-operator operating largely in the domestic market.

A total of 51 of Aegean's 70 summer network destinations are international while all but seven of Olympic's 45 destinations are domestic. Indeed Olympic axed its services to Brussels, London, Paris and Vienna to put more focus on its domestic operations after the EC blocked its merger last year.

Aegean Airlines route map (Oct 2012)
Key: red=intercontinental, blue=regional, yellow=domestic; Source: Innovata Flightmaps Analytics Olympic Air route map (Oct 2012)     Key: red=intercontinental, blue=regional, yellow=domestic; Source: Innovata Flightmaps Analytics

Greece has suffered from huge economic turmoil over recent years. The country's GDP has been in decline since 2008 and its problems culminated in its high-profile bailout from the European Union and accompanying sweeping austerity measures. Against this impact, the Greek aviation industry has slumped. For example passenger numbers at the main Greek gateway Athens International Airport are down 2 million since 2008. At 14.4 million passengers, Athens handled only a small amount more passengers in 2011 than it did in 2005.

Likewise traffic figures for its principle airlines have suffered. Aegean carried just over 5.8 million passengers in 2011, which is fractionally below the 5.9 million it had in 2008. It expects to carry 6 million this year. Olympic Air carried 3.3 million last year and expects this to fall to 2.9 million this year. The prior Olympic Airlines operation handled 5.2 million passengers in 2008.

How the European Commission views these factors will be crucial to the success of new merger attempt and will be of interest to those not just within Greece. Irish carrier Ryanair will be watching with particular note as it continues to campaign for clearance to merge with Aer Lingus. The budget operator has long complained that most recent European airline mergers have been cleared - albeit with various concessions - but that its move for Aer Lingus together with the earlier Greek merger plan have been blocked.

Ryanair in August allowed its latest takeover bid for Aer Lingus to lapse after the EC opened a probe into the acquisition, which will not make a decision until January. In opening its investigation the EC raised concerns about the potential competition consequences of the two carriers competing on a number of route where only the two airlines operate. While allowing its offer to lapse, Ryanair said it would renew its takeover bid if regulatory approval is eventually granted.

Mergers and consolidation have been a central development in the struggling European airline sector over recent years. Much of this has been led by the network major carriers of Air France, British Airways and Lufthansa, though their appetite for more acquisition appears to have slowed of late as they concentrate on tackling their own issues - notably in short-haul markets.

"Size is not a guarantee of success," said analyst Chris Tarry, from CTAIRA, during a recent panel debate at the recent Airline Business-organised World Air Forum in Amsterdam. "Consolidation in my view is not the panacea to the problems in the area [Europe]. A lot of cost has to come out, and we haven't seen it yet," he says.

Source: Air Transport Intelligence news