Background: The airline industry of today functions in a very intense and competitive market and is also very sensitive to change. Over the last years the airline industry has changed and been affected drastically. Factors like sudden shocks, such as the terrorist attacks of September 11^th in 2001 and the SARS (Severe Acute Respiratory Syndrome) phenomenon in China 2003, change in macroeconomic factors, such as GDP growth in different regions, changes in the oil price and fluctuations in exchange rates, and also by the fact that the airline industry have experienced a general change in structure and trends. A consequence of these shocks and general industry changes, also made worse by the ongoing financial crisis and escalation of fuel price many airlines have lost a significant part of their market value. The fact that during a normal year around eight airlines in the world go bankrupted but that Sterling became the 31^st in 2008 strengthens this statement.

Problem: All these incidents the airline industry has been exposed to, combined with the overall industry change in structure and trends, have given the European airline industry the shape that it has today, and the change is not over. This emphasizes the importance and interest to map out the airline industry of today with the most recent and major events in consideration and also the curiosity for the fact that differences in how the different airlines have been affected should exist.

Purpose: The purpose of this thesis is to investigate how industry change has affected the profitability and capital structure of European airlines, individually and in comparison with each other.

Method: Six actors in the airline industry were selected for a descriptive type of study that takes a deductive approach. Secondary numerical data from the airlines’ annual reports was used and analyzed and conclusions were drawn based on existing theories. Quantitative calculations for different financial ratios were made. To get analysts’ viewpoints and more depth and detailed description of the topic, a qualitative approach was used in the form of interviews. For a more structured analysis and to easier evaluate the development of the financial situation of the airlines an observational scheme was developed.

Conclusions: For the three financial aspects studied, significant patterns were observed that could be explained by the shocks and trends that have changed the European airline industry. The strongest empirical findings indicating affects of this kind was for the levels of profitability, both for traditional airlines and Low Cost Carriers. The shocks of September 11^th and SARS, with their respective consequences and aftermaths, were reflected in the findings and also the effects of the general industry trend of an increase in competition.