Too Strategic to Ignore? Competitive, Political, and Structural Dynamics in European Aviation

Abstract

This thesis, grounded in critical realism, investigates the current structural changes in aviation and makes an ex-ante prediction of how the market may evolve. It argues that this development reflects industrial policy via regulatory forbearance, a form industrial policy via selective non-enforcement of competition regulations. Theoretically, it adopts Industrial Organization, Industrial Policy, and Political Economy theory to analyze the current market structures in European aviation. The findings suggest short-term competition escalation between airline alliances – SkyTeam and Star Alliance – will intensify globally, in Europe, and regional markets. This will benefit consumers via lower prices, more routes, and higher frequencies of flights in the short term. However, this competition pressure will put weaker airlines into financial distress, eventually leading to further consolidation in aviation. This consolidation will eventually lead to the future dominance of the Lufthansa Group and Air France-KLM. To explain these outcomes, this study asks: “What deep mechanisms or structures can explain this outcome?” and suggests the concept of regulatory forbearance as a subtle form of industrial policy. Investigating 25 years of rulings of The European Commission (the Commission) European Union Court cases, merger cases, and state aid investigations in aviation, this thesis identifies a pattern of leniency toward Lufthansa Group and Air France KLM. This regulatory non-enforcement aligns with broader EU political objectives: The generation of two globally competitive, large European airline groups, originating in France and Germany. The analysis and discussion suggest that the EU may be more lenient toward Air France-KLM to counterbalance the dominant position of Germany within the EU and aviation. Beyond market dynamics, a discussion on the role of ownership links, both common ownership by institutional investors and non-EU state-owned airlines, is raised. This thesis suggests that both types of ownership soften competition and harm consumer welfare. However, the ownership links to non-EU state-owned airlines involving, particularly China and Qatar, may embed foreign influence in aviation. Moreover, the discussion raises associated risks with these ownership links and draws comparisons to Qatar’s political leverage from being a major gas exporter to the EU and China’s Belt and Road Initiative. Overall, the conclusion is that further consolidation in European aviation is likely, and current EU competition regulations may not prevent it. Rather, it understands that it may be politically viable to foster such consolidation. The findings raise broader questions about strategic autonomy, foreign ownership in a critical sector, and the role of industrial policy, both active and passive. While this thesis does not claim final causality, it provides a theoretically grounded interpretation of the current structural changes within aviation and identifies these areas for future research.