The Mojave Desert has a special place in the hearts of aviation enthusiasts: it is one of the largest airplane graveyards in the world and is home to aircraft retired by airlines every day. Last year, the last Air France Boeing 747s landed there.
If these places have something mythical for any self-respecting “Avgeek”, we must not forget that it is not only aircrafts that end up in the graveyard: the airlines to which they belonged can also follow the same path, even if some people refuse to consider such eventualities and believe their carrier/employer to be so immortal that they end up unconsciously bringing it down.
The airline industry: a positive balance of births and bankruptcies but…
This article I saw last month reminds us how fragile the sector is. Active, but just as fragile. Between January and October 2017 25 airlines went out of business as a result, a spectrum that ranges from startups that failed to take off to the 50-year-old Monarch Airlines. The good news is that at the same time 79 were born. We could be satisfied with this positive balance and say to ourselves that there is no reason to be alarmed, but it is still important to understand the mechanisms at work.
Air transport is from a certain point of view a sector like any other. At a given moment the market is mature, the forces involved are known and the balance of power is stable. Then comes an innovation (or a crisis, for that matter) that allows new players to position themselves with a definite competitive advantage over those who have to deal with their existing and their past, and reshuffles the cards between the established players, between those whose inertia makes it difficult to adapt and those who are agile enough to counter the new ones. Then the system returns to equilibrium, the market reconsolidates, and we count the dead and the survivors until the next disruption.
Innovation is about business models
In the airline industry, innovation has long been technological, posing a challenge to airlines in a very capital-intensive sector: to equip themselves with the most efficient technologies while flying and replacing, more or less quickly, existing aircraft that are rapidly losing their competitiveness. But the latest crisis was of a radically new kind.
Of course, we can say that Norwegian, EasyJet and Ryanair had the advantage of a young and rationalized fleet, unlike the historical players, but the failure of some young low-cost airlines shows us that this is not the whole story: the last innovation in air travel concerned the business models and the capacity to execute them. Remember: one is born low cost, one does not become so. Give a legacy airline a young and inexpensive fleet to operate, and it won’t match the performance of some of the start-ups that have the organization and the ability to execute that goes with this new model. Add to that a crisis that made this model even more relevant and you have the spark that ignited the market.
Since good things always come to an end (or bad things, depending on which side you’re on), the system is gradually returning to equilibrium and we can begin to take inventory of a consolidating market.
It is not only the legacy airlines that are failing
There is no doubt that the big winners of the current year are the low-cost and the “Gulf Sisters”. The former because of their business model, which is totally adapted to the times and to a new demand, and the latter because of their ability to mobilize enormous amounts of cash to finance rapid growth.
However, the sky is not infinitely expandable and many low-cost airlines have also ended up in the graveyard. Today the “winners” face a double challenge:
– consolidation: and we see the great maneuvers of Ryanair and Easyjet around the remains of Air Berlin and Alitalia.
– premiumization: and this is not the least of the challenges, low-cost customers are also becoming more demanding, asking for a little more service and flexibility. The challenge will be to accompany this evolution in demand without losing our soul and our economic model. I would add that this move upmarket will also affect the staff: the flight of Ryanair pilots to Norwegian in particular shows that the model may have its limits.
As for the Gulf Sisters, it remains to be seen in what state Qatar will emerge from the crisis with its neighbors Emirati Emirates and Etihad, or whether Etihad can continue to survive on its own after the failure of a strategy of partnerships and alliances that is totally risky.
The legacies survived but at what cost…
As for the legacies, they finally let the storm pass but came out of the battle in very different states.
In Europe alone, Lufthansa has limited the damage, IAG (British Airways and Iberia) has survived at the cost of an unprecedented deterioration in the customer experience, and if the sick Air France-KLM has escaped the worst, its health remains fragile. His vital prognosis is no longer engaged but he has to remain under observation and the future will tell if the cocktail of multicolored pills it is self-prescribing (Hop, Joon, Transavia) has been the right treatment. On the other hand, the future will surely be written without Alitalia: the commercial brand will perhaps or certainly remain, but the state of the airline makes it approach this phase of consolidation as a sick prey and not as a predator.
As for the US airlines, they have made good use of their magic weapon: Chapter 11, which is only the local version of the disguised subsidies of the Gulf.
What landscape in the European sky?
Consolidation means that some players will inevitably disappear. There will probably only be 5 or 6 major players in the European sky if we are to believe the specialists. The others will die or be acquired.
What are the 6? Easyjet and RyanAir for sure, Norwegian certainly. And some surviving legacies: IAG, Lufthansa, Air France KLM. And which ones have the means to participate in the consolidation? Even if Air France KLM surprised everyone by acquiring a part of Virgin Atlantic, the airline does not seem to have the resources to do more and must first of all reduce its debts and finance the endless upgrading of its cabins. Lufhansa is looking with interest at the remains of Air Berlin. What’s next? We can bet that Easyjet and Ryanair will take the lion’s share of possible acquisitions.
Unless the Chinese and American airlines (Delta?) come and disturb the game with alliances and minority shareholdings.
Meanwhile Qatar has just announced a 9.1% stake in Cathay Pacific. This is just the beginning.
Within one to three years, the number of flags in the European sky is likely to be drastically reduced. It remains to be seen who will eat whom.
Photo credit: By Alan Radecki – Personal work, CC BY 2.5, https://commons.wikimedia.org/w/index.php?curid=1375409
