The last few months have seen a significant number of airlines experiencing difficulties or even disappearing. This may seem surprising in a context of continuous growth in the number of passengers, but it can be explained. Worse: this is surely only the beginning and others will follow.
Earlier this year we reported on the airlines in trouble. The least we can say is that the situation has not improved for any of them.
Why, despite the growth in traffic, has it come to this?
Rising costs
Operational costs are a key factor for the health of a business, and even more so when they are proportional to the activity, like fuel costs for example. When an airline buys fuel at a price that is too high in relation to the price at which the customer is willing to pay for the ticket, not only does the airline lose margin, but it also loses money, but the more customers it has, the more flights it operates, the more money it loses (or earn less than expected). In such conditions, it is possible to reach a stage where it is better to reduce operations than to ride on the growth of demand.
Today, the fuel bill, if not at the level of 2012 when it represented more than 30% of the expenses of the airlines, has suddenly increased and nothing says that it will stop. This is one of the main problems of Norwegian for example.
Then the cost of labor. This is constantly increasing due to recruitment needs but also to social pressure in low-cost airlines where employees are less and less tolerant of the current model. According to IATA, airlines lost $5 billion last year due to rising labor costs.
Finally the taxes. We will talk about it again in another article, but contrary to popular belief, air transport, between taxes and various fees, is already heavily taxed and it is not the future eco-taxes promised by governments who are buying themselves ballots and a good conscience with greentaxing that will fix things.
Growing too fast
For many young airlines, especially low-cost ones, when you don’t have much margin on each passenger, you need a lot of passengers, which means a forced growth of the fleet.
The race for growth is good when customers follow and costs are controlled. Today there is real overcapacity, especially in Europe, where there are 40% more aircraft than 10 years ago. As a consequence of overcapacity, prices are collapsing and as costs increase, the more aircrafts you have, the deeper you dig your grave.
Networks that are too extensive
When you have more and more aircraft, you quickly feel the need to multiply the routes and destinations. But an extended network has a cost: installation in a new airport, operations and ground staff, marketing costs of launching a route, time needed for this route to become “anchored” in the landscape for the potential customer…
And in case of incidents (delays, cancellations) it is much easier to propose a solution to the customer when you can easily mobilize a “nearby” aircraft which is not the case when you have an extensive but less dense network in terms of aircrafts per route. The icing on the cake is that these incidents, if a response is not found quickly, increase costs due to compensation owed to customers.
The perfect example is long-haul low-cost airlines. The logical continuation of the medium-haul route to seek new sources of growth, it remains a glass ceiling for all those who have tried it, so much so that an airline like Eurowings has finally decided not to risk it.
The 737 MAX effect
No airline has yet attributed its difficulties to the problems encountered with the 737 MAX, but I think it will be soon. Today, these are aircraft that the airlines have bought, that they pay for and that cannot fly. In the long term it is also under-utilized personnel due to unused flights.
Some airlines are already starting to present the bill to Boeing, but until a settlement is reached, the amount of accumulated losses could be staggering, not to mention that we don’t know when the 737 MAX will fly again or if it will ever fly again.
No change on the horizon
What does the future look like? Oil will surely remain at a high level, we don’t see the cost of labor going down, the 737 MAX won’t be flying again anytime soon and the growth/profitability equation remains as complicated as ever for young airlines. And increasing the number of passengers will do nothing: when you are structurally unprofitable or not profitable, adding passengers, planes and flights will only help to increase your losses.
Let’s add to that the great unknown of the Brexit. Technically speaking, everything can go well, but only if we decide to do it, hard Brexit or not. But in the meantime, too many uncertainties still weigh on British airlines in the event of a poorly designed Brexit.
Is everything lost? Far from it. We are going to see a movement of concentration which is the only way to allow an industry which has given birth to many colossi with feet of clay to rest on more solid and healthy bases.
This has already started in Canada. It’s not certain that we won’t one day talk about a marriage between Norwegian and IAG and, in a general way, about a rapprochement between legacies and low-cost airlines. As for the majors, we are waiting to see how long Etihad will be able to survive without calling Emirates for help, and who will finally get their hands on Alitalia.
Photo : Wow Air by Vytautas Kielaitis via Shutterstock
