Will the COVID-19 be the death of low-cost airlines?

The fact that a major crisis will hit the airline industry in 2020/2021 was something expected but not really for the reasons we know today. We were expecting a sectoral crisis of overcapacity and not a global health crisis, even though in the end it will end in a crisis of overcapacity.

Carsten Spohr the visionary?

One cannot help but recall the words of Carsten Spohr, CEO of Lufthansa, last year when he said that tomorrow there will be only 12 major airlines left in the world, an outcome that seems more and more credible, even if no one had imagined the current scenario.

At the time, we wondered whether the low-cost model would survive the crisis and we have to admit that the question is even more important today.

Why should low cost airlines be more fragile than others?

Warning. The point is not to say that a crisis would mainly affect low-cost airlines, but that they could suffer more than others. In other words, the fate of a legacy airline would have more to do with its management, its strategy and its own factors, whereas the fate of a low-cost airline would have more to do with the fact that it is a low-cost airline. A crisis of the model independently of the airline’s strategy, so to speak.

What is the particularity of the low-cost model? To put it in the simplest way possible, when you have low prices you have low margins in absolute value, so you need a volume strategy. The sine qua non condition for the success of a low-cost airline is the growth of its fleet, even hypergrowth.

Today, an airline like easyjet has a fleet of 336 aircraft, with another 107 on order. 300 aircraft at RyanAir for 187 on order. To mention only these two.

Does that sound low to you? Air France’s total fleet is around 220 aircraft, including long-haul flights, a market from which the two low-cost carriers are absent. 351 at Lufthansa and 761 at Lufthansa Group, including long-haul of course.

Weight loss cure for everyone

Make no mistake: the crisis will affect everyone. Delta has warned that it will emerge from the crisis slimmed down, Lufthansa is shedding 30 aircrafts and there is talk of a necessary cut of 100 aircrafts at Air France! But we will talk about the specific case of legacy airlines in another article.

The question that will arise is whether a low-margin model can survive with a small fleet. A traditional airline can be profitable with a small fleet by being hyper-specialized on a market, a few lines or a type of product, but can it be the same for a low-cost airline?

We had part of the answer last year with repeated bankruptcies in the sector while leaders like easyjet or RyanAir were firing on all cylinders. Each time it is the “small ones” who have disappeared.

easyjet out of cash in August

The current governance crisis at easyjet is also significant. The airline currently has 107 aircraft on order, a subject on which the management and the founder and main shareholder, Stelios Haji-Hioannou (11% of the shares and 34% with his family) disagree. For the latter, if this order is not cancelled, the airline will run out of cash in August. He has tried, to date in vain, to have the Chairman of the Board of Directors and the Chief Financial Officer removed from office. But this is not unique to low-cost airlines, most of them are in this case.

RyanAir has a different view. Comfortable margins and 30 years of growth have allowed it to build up an impressive mountain of cash, and a questionable social policy combined with an equally questionable customer policy have allowed it to be as less hurt as possible and to look forward to the future, so to speak, serenely… at least in the long term.

Moreover, the airline said it was vigilant about a possible policy of state aid to other airlines, saying that it could result in a distortion of competition. A way of saying or letting believe that it does not need help.

But it is hard to believe that in a context of collapsing demand and the gradual reopening of borders, it will not have to significantly reduce its size, which would confront it with the same problems as the others.

I am only talking about RyanAir and easyjet because they are the most emblematic of the triumphant low-cost model. Including Norwegian would have been interesting but not very relevant because its future is as much linked to the outcome of the COVD-19 crisis as to the fragility it already had before entering it.

But if medium-term cash flow issues are a subject, they do not answer the question of the ability to be profitable in a contracted market.

Another element of answer at easyjet? According to its founder, once again, “I believe that at the end of national confines, easyJet will be more like a start-up trying to find new profitable routes for a few aircraft”.

This confirms our fears: no more growth and profitability on volumes, it will be necessary to specialize on a few profitable routes and abandon the rest. Unless the business model also evolves, completing the company’s long-standing move from low cost to medium cost.

Towards a reversal in demand?

We also hear a lot that in “the next world” it will be the end of weekend trips for cheap, which must please Carsten Spohr who said that “flights at 10 euros should not exist”. It is an option that makes sense and that would mean, if we draw all the consequences, the end of low-cost. Not their model but their market.

We can also think that after the phase of angelism that accompanies each crisis (and we know from experience that dreams of a different post-crisis world never last very long) this is exactly what people will ask for. Getting a change of scenery for cheap. And as long as there is demand, it is hard to see why those whose job it is to satisfy it should not make a profit.

It is far too early to know what the landscape will look like at the end of the tunnel. A photograph of the one before but with a slimming cure for all? A concentration movement? We’ll talk about it as leads emerge.

For the moment we have a certainty: each airline will be challenged:

  • In a generic way according to its business model.
  • In a specific way according to its own strategy.
  • With as a favourable or aggravating factor its condition before entering the crisis.

The low-cost ones will not be exempted…but neither will the others.

Photo : A319 Easyjet by Nieuwland Photography via Shutterstock

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.
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