After Thomas Cook, European industry must embrace consolidation

After Thomas Cook, European industry must embrace consolidation

Thomas Cook, one of the biggest holiday companies in Europe, collapsed in dramatic fashion on Monday, with consequences ricocheting from Rome to Riga. The British government is undertaking the largest peacetime repatriation effort in the country’s history to bring some 150,000 stranded citizens home, while tourism-dependent economies like Crete risk taking a huge hit.

Commentators have been quick to blame everything from Brexit to last summer’s heatwave for the 178-year-old firm’s fall from grace, but aviation industry insiders have cautioned that Thomas Cook’s demise points to a deeper malaise. Compared to regions such as North America, the European market remains highly fragmented—leaving companies short of capital, fighting for scraps of market share, struggling to clinch third-country flying rights deals and unable to compete effectively.

Thomas Cook’s rivals saw their shares temporarily buoyed by the travel giant’s sudden implosion, but are understandably skittish that their planes will be the next to be grounded unless European carriers take what Oliver Wyman deemed the “necessary and inevitable” step of consolidation. EU norms and national pride in legacy carriers has so far stymied the requisite mergers, but Thomas Cook’s collapse may kickstart a new search for synergies.

The dangerous fragmentation of the European market goes far beyond the aviation sector, however, and pervades any number of the continent’s industries. Aside from its aviation industry, Europe’s telecom market stands out as being in particularly bad shape. The sector has remained an incredibly fragmented patchwork—with nearly 450 individual telecom companies and costly radio spectrum allocations which continue to take place at the national level—and is nursing deep wounds from years of price wars over 4G data. Many companies in the industry had hoped the rollout of the next-generation mobile network known as 5G would give a badly-needed boost to their stock market performance, but the sector’s enduring fragmentation risks causing Europe to fall well behind the US and Asia on implementing the cutting-edge technology.

5G, once deployed, is set to be a €225 billion boon for any number of industries on the continent, opening the door to everything from smart drones to remote surgery to autonomous vehicles. Europe, however, is hardly in the best place to take advantage of these opportunities. Particularly within the European Union itself, regulatory hurdles and the high costs of spectrum are putting the brakes on progress in rolling out 5G. Only about half of the EU’s member states have published national strategies for adopting 5G, and a significant portion of the necessary spectrum has yet to be allocated.

Some European countries are pushing ahead faster than others. Switzerland, for example, is set to cover the vast majority of its population with 5G by the end of this year. Despite this progress, Switzerland has yet to find a balance of fair competition in its telecoms sector. Leading firm Swisscom has seen its market share has actually increased in some sectors since unbundling—as a result of this ineffective competition, Swiss mobile prices are an average of 57% higher than those in the EU.

Swisscom’s outsize influence has spawned the latest drama in the industry, as the Alpine country’s second-biggest operator, Sunrise, has announced plans to purchase cable operator UPC. As one of Sunrise’s shareholders in favour of the deal remarked, the acquisition would allow the telco to offer customers more attractive bundles without having to rent Swisscom’s network—sparking healthy competition in the Swiss telecoms industry.

Where EU norms and national pride have served as barriers to consolidation in the aviation sector, activist investors have threatened to torpedo the Sunrise deal. German telecom group Freenet, which holds 24.5% of Sunrise’s shares, is objecting to the acquisition—and may have even been behind calls for Sunrise Chairman Peter Kurer to be ousted.

Sunrise has insisted that Freenet is missing out on a good opportunity to reap up to 280 million francs in annual synergies, as well as becoming an effective competitor to Swisscom. One of Sunrise’s largest shareholders even suggested that the company’s shares could double in value over the next five to ten years if the deal went through – which explains why in recent days 3 of the company’s biggest shareholders endorsed the deal.

Freenet, however, seems focused on reducing their debt problem and has been refusing to allow the deal to go through. The German telco is in fragile financial straits, and is languishing in 5th place in the overcrowded German telecom market, forced to lease mobile services from third-place Telefónica. Freenet has been bleeding customers and carrying a heavy debt load whose repayment it’s trying to juggle.

In fact, Freenet’s plight is emblematic of the troubles which smaller telcos are facing across the bloc as the European Union has come to prioritise low prices for consumers over all else including the very financial viability of companies in the sector.

EU competition czar Margrethe Vestager has led a crusade against consolidation in the European telecoms sector, blocking high-profile mergers from Telenor and Telia’s attempted fusion of their Dutch assets to the proposed O2-Three tie-up. Even in the face of criticism from other Commissioners and industry leaders, Vestager has tried to keep at least 4 distinct mobile operators in each EU member state—a huge number in comparison to the four operators who control 90% of the American telecom market.

To the industry’s consternation, Vestager will not only continue to head up the bloc’s competition policy in the new Commission which will take over in November, but has also been put in charge of piloting the EU’s digital strategy. With this expanded portfolio, Vestager seems unlikely to ratchet down her staunch opposition to telco mergers and acquisitions.

Vestager will, however, increasingly be confronted by the consequences of maintaining such a fragmented market: from companies like Sunrise struggling to take advantage of investment opportunities, to European operators falling irreparably behind in the race to 5G, to the ever-present risk of one of the sector’s leading lights imploding in as spectacular fashion as Thomas Cook.

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