Which European airlines will survive?

Swissair cancelled flights for two days after it ran out of cash

By CNN's Charles Hodson

LONDON, England (CNN) -- If you can't operate, consolidate.

That is one possible way out of the crisis facing European airlines.

With Belgium's Sabena airline filing for bankruptcy, the problems confronting the industry in recent weeks have been:

* The collapse of major flag-carriers

* A public that's uncertain and nervous about flying

* A broad recession in the business

* Steadfast opposition from the European Commission to state bailouts

* An acknowledged problem of overcapacity in the industry

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Last month, KLM Royal Dutch Airlines announced it was cutting 2,500 jobs.

That followed Swissair's decision days earlier to cancel flights for two days and Sabena's move to file for bankruptcy protection.

To add to the misery, British Airways said it was cutting 5,200 more jobs.

Europe's airline executives have long privately admitted that as a group they suffer from overcapacity -- by a factor of 20 to 30 percent, according to some analysts.

One or two brave bosses have even spoken openly about the need to slash the number of airlines in the continent.

"If you accept that there will be only three or four, maybe five maximum global airlines, and we have more than 20 European flag-carriers … consolidation in Europe is inevitable," KLM CEO Leo van Wijk told CNN in February.

Van Wijk is painfully familiar with the example of the United States -- a far bigger economic unit with only three or four major carriers, plus a similar number of strong regional airlines.

For the U.S. airline industry, those numbers mean lower costs, greater financial stability -- the present crisis excepted -- and more effective competition. But unlike Europe, where borders divide cultures and brands of nationalism, the United States is not riven by national frontiers.

For many European governments, any failure to support a flag-carrier would be electoral suicide, and any significant downsizing of a national carrier would involve genuine political risk.

If that was not enough, international aviation is already one of the most heavily regulated industries in the world.

This complicates the task of consolidation because regulators like the European Commission take long hard looks at potential mergers or acquisitions, in case they hand one player a dominant position on a particular route.

Governments, too, are reluctant to let carriers from outside their borders dominate domestic routes.

So even if a powerful airline did try to consolidate by acquisition, it could actually end up with less that it bargained for, said Tim Coombs, managing director of the consultancy Aviation Economics.

If British Airways, for example, were to purchase KLM, the UK carrier would automatically lose the international route licences held by the Netherlands-based airline outside of Europe -- stripping it of about 40 or 50 percent of its traffic and revenues, Coombs says.

But there is a viable, if less straightforward alternative to the merger and acquisitions route: build up the current airline alliances into galaxies of carriers -- some bigger, some smaller, all feeding and supporting each other through code-sharing.

Such a scenario would allow sharing or building synergies in costly areas like purchasing, training, maintenance, ticket sales, e-commerce and frequent flyer schemes.

It would also sidestep some of the regulatory hurdles associated with full mergers.

However, regulators would still need to clear such alliances, especially on lucrative routes like those over the Atlantic.

U.S. and European authorities may be moving towards an acceptance that consolidation is good for air passengers as well as the companies concerned, says Chris Partridge, who follows the airline sector for Deutsche Bank in London.

Ultimately, he says, authorities may be moving towards granting anti-trust immunity -- in other words, regulatory approval of alliances.

"I think there's going to be a push for anti-trust immunity across the Atlantic, which will naturally strengthen the stronger players and weaken those weaker players, and they will then fall into and behind those stronger alliance groups," Partridge says.

But this may all take time -- and the process of consolidation has indirectly been slowed by last month's terror attacks.

The decision by President George W. Bush to grant U.S. airlines billions of dollars in financial support in the wake of the September 11 terror attacks has increased pressure on European governments and the European Commission to endorse similar state support on their side of the Atlantic.

Government bailouts for Sabena and Swissair have increased that pressure still more.

So taxpayers' money may well buy Europe's weaker airlines a longer lease on life -- and delay the day they may be forced to admit they are no longer viable on their own.