(Adds IAG comments, background, analysts' comment)
By Sarah Young
LONDON, Sept 8 (Reuters) - An increasingly competitiveEuropean airline market could soon bring consolidation andpossibly European low-cost carriers providing local connectingservices or "feeder" flights for full-service long-haulairlines, the CEOs of easyJet and IAG said onThursday.
Low fuel prices have led to a big growth in capacity onEuropean routes, putting market expansion at a 10-year high onforecasts that airlines will add new capacity of 8 percent overthe next six months.
But inevitably increased competition is causing fares todrop, good news for consumers but bad news for the profitmargins of airlines.
Carolyn McCall, the chief executive of low-cost airlineeasyJet said she expected more consolidation over thenext 12 to 18 months, with weaker airlines suffering in thetougher trading conditions, as the previous boost to marginsfrom lower fuel prices is competed away.
Willie Walsh, the chief executive of British Airways-ownerIAG, said IAG was not currently actively considering anyacquisition deals.
"I think there are airlines out there that would like to beconsolidated into a larger group, I get calls from a lot ofthem," said Walsh, who has been Europe's most active acquirer ofairlines in the past five years, combining BA with Iberia toform IAG, which has since taken over Spanish budget airlineVueling and Irish airline Aer Lingus.
Deutsche Bank on Wednesday downgraded its investmentrecommendations for Ryanair, Lufthansa, AirFrance-KLM and IAG, with the analysts saying there wastoo much capacity in the industry and prices would fall furtherthis winter.
Price drops could stimulate further change in the industryin the longer term, McCall said.
Some higher-cost full-service airlines could retrench,cutting back their own short-haul operations and giving low-costairlines like easyJet the opportunity to step in instead toprovide the feeder flights needed for their long-hauloperations, as well as expand route networks.
With legacy carriers such as Air France-KLM andLufthansa struggling to bring costs down on theirnamesake brands to compete with low cost carriers on short haulroutes, using low-cost carriers instead for feeder flights couldbe a more cost effective way of bringing passengers to hubs forlong-haul connections.
There have been suggestions for well over a year by bothRyanair and easyJet, Europe's two biggest low cost carriers,that they could provide feeder flights for long-haul carriers,but so far no deal has been struck.
However, both Air France-KLM and Lufthansa have beenbuilding up their own low-cost carriers, Transavia andEurowings. In addition, one key sticking point has been decidingwhich carrier would bear the costs of rebooking andaccommodation in the event of missed connections.
"It would make a lot of sense for us to offer feed. Thething for us we have to think very carefully about is that itdoesn't contaminate our model," McCall said.
"I think it's inevitable that over the next five to 10 years there will be much more of that happening, there will bemany more alliances and partnerships where low-cost feeds thelegacy carriers."
IAG would be open to the concept, Walsh said, noting thatalready its customers fly into easyJet bases like London Gatwickand connect onto a British Airways flight without there being adeal between the two carriers.
"If we can facilitate that for the customers in a way thatmakes sense that doesn't increase our costs or complexity ...then we want to do it," he said.
However, Lufthansa said it already has a low-cost carrierwithin its group, Eurowings, and therefore does not need to usethird parties. "We don't need any additional support here," aspokesman said on Thursday. (Additional reporting by Victoria Bryan in Frankfurt; Editingby Greg Mahlich)
easyJet (EZJ)
