COLUMN-Consolidation Air, nobody's favourite airline: A. Smith

-- Alexander Smith is a Reuters columnist. The views expressed are his own --

By Alexander Smith

LONDON, Sept 15 (Reuters) - With airlines around the world struggling to survive the economic downturn, the time should be nearing to break the taboo of consolidation in the sector.

Airlines around the globe face losses of $11 billion in 2009, according to IATA [nWBT013153]. Margins are expected to fall this year and next, with analysts predicting carriers are likely to struggle for years to reach levels needed to produce an acceptable return for capital market investors.

Societe Generale estimated in a recent note that margins would drop to -3.1 percent in 2010 before recovering to 1 percent in 2011, well short of the 10 percent needed.

Effectively we are back to the ice age of 2001-2.

Eight years ago, the collapse of Sabena and Swissair kicked open the door of cross-border consolidation -- within Europe at least. But while deals like Lufthansa's (LHAG.DE) merger with the Swiss airline allowed for some rationalisation, the merged entities remain hamstrung by national aviation regulations.

Replacing this patchwork of national carriers with viable global companies able to withstand economic shocks is the necessary next step.

The European Union's open skies agreement has shown what is possible. It has allowed M&A to take place within the bloc, and this has led to the creation of four major players -- Air France-KLM, British Airways, Lufthansa and Ryanair (RYA.I).

The challenges now are even greater than they were at the turn of the millennium.

High and rising fuel costs, environmental pressures to reduce CO2 emissions, overcrowded and often inefficient airports, limited landing slots and planning constraints on building new terminals and runways mean yet more financial pressure to reduce the number of planes in the skies and make airlines more efficient.

But despite the pressure on the sector, airline reform is still creeping forward at a snails' pace. Instead of making dramatic changes to the model, airlines are forced to find ways around the rules to eke out savings and to line themselves up for consolidation when it comes.

This is why Air France-KLM (AIRF.PA), Delta Air Lines (DAL.N) and AMR Corp's (AMR.N) American Airlines are showing such enthusiasm for taking a stake in loss-making Japan Airlines Corp (9205.T) (JAL) in a bid to expand in Asia via code-sharing arrangements (common ticketing agreements) [ID:nT194467].

For the Japanese government, which is engineering the JAL restructuring after bailing it out, the deal represents an opportunity to push an open skies deal with the United States.

Oneworld and to a greater extent SkyTeam -- which includes Air France and Delta -- are both relatively under-weight in Asia and will seize on any opportunity that comes along. If winning the prize means providing cash to bail out an ailing airline such as JAL, then they see it as a necessary evil.

The barriers to rationalisation are many. Governments love having their "own" flag-carriers. Planes carrying the national flag are almost a statement of a country's prowess.