* Thomas Cook collapse highlights common threats
* Two French carriers in bankruptcy court
* Bust airlines list expected to grow
By Laurence Frost
PARIS, Sept 23 (Reuters) - The collapse of travel group
Thomas Cook and a trio of subsidiary airlines, leaving
600,000 holidaymakers stranded, is unlikely to be the last
failure among Europe's struggling second-tier carriers.
As Britain was activating plans for its biggest peacetime
repatriation, two smaller operators, Aigle Azur and XL Airways,
were before the French bankruptcy courts on Monday.
Shares in larger airlines rose on expectations that Thomas
Cook's demise would bring them more passengers, higher fares and
new airport slots. But many are wrestling with similar problems.
"We expect all the airlines we cover to rally today but we
caution investors not to get over-exuberant, given other
challenges," said J.P. Morgan analyst David Perry - citing
higher fuel prices, a strong dollar and cut-throat competition.
The list of sector bankruptcies is growing: Monarch, Air
Berlin and Alitalia failed in 2017, followed by Primera and
Cobalt last year and Germania, Flybmi and Iceland's WOW so far
in 2019. Regional operator Flybe's sale to a Virgin Atlantic-led
consortium has narrowly averted its collapse.
Larger European carriers are not immune from the threat.
Third-ranked low-cost operator Norwegian Air, which
has bled cash while making inroads in the transatlantic market,
won a reprieve from creditors last week, postponing repayment on
$380 million in debt for up to two years.
Last week's oil price spike that followed attacks on Saudi
infrastructure will have a knock-on effect for kerosene prices
that were already running high.
BREXIT 'LAST STRAW'
The strong dollar has further inflated prices for fuel and
plane leases - two of the sector's biggest costs that are
usually billed in the U.S. currency.
For British operators the problem is exacerbated by the
pound's slide, amid worries over the country's impending
European Union exit. At Thomas Cook, currency effects likely
increased some leasing costs averaging $250,000 per jet by about
a quarter once converted into sterling, industry sources said.
The venerable travel brand also suffered from deliberate
price-slashing by rivals TUI and Jet2,
Bernstein analyst Richard Clarke said, and a "flood of cheap
flights" from online-only operators.
But he added: "Brexit was likely the straw that broke the
camel's back."
European airline traffic has grown 1.6% so far this year,
according to air traffic control body Eurocontrol, about half
the rate assumed in industry capacity plans. That has made it
harder to fill planes or raise fares, adding earnings pressure
that can be eased by bankruptcies or mergers.
The liquidation of Thomas Cook's 1% share of the market for
European flights is unlikely to bring much relief on its own.
Shares in easyJet, seen as one of the more likely
airline beneficiaries, were nonetheless 3.2% higher at 1345 GMT,
with Air France-KLM up by 1.5%, Lufthansa by
0.6% and Ryanair 0.4%.
FRAGMENTED
Smaller airlines are more vulnerable in part because they
struggle to cover fixed costs accounting for a sizeable share of
their budgets for maintenance, training and other essentials.
XL Airways, which was in court to be placed under bankruptcy
protection on Monday, last year transported 730,000 passengers,
mainly to the West Indies and Reunion Island.
In another courtroom on the other side of Paris, bidders
including IAG's Vueling and a former Air France
executive were presenting offers for Aigle Azur. Between them,
the two carriers employ 1,700 staff and operate 15 Airbus jets.
Europe's fragmented market of small carriers reflects
impediments to consolidation that prevent them merging to gain
critical mass - including third-country flying rights deals that
remain national - and can thwart rescues when they fail.
Air France withdrew an offer for Aigle Azur last week after
it became clear absorbing the carrier would require a complex
deal with its own unions. EasyJet also dropped out.
Phil Seymour, chief executive at UK aviation consulting firm
IBA, believes the biggest single threat remains the strong
dollar, "against the euro and particularly against the pound."
Multiple strains on the sector will continue to push
airlines towards bankruptcy, he said. "We expect to see more."
(Reporting by Laurence Frost; Additional reporting by Tim
Hepher and Tommy Lund; Editing by Mark Potter)
