The airlines are experiencing a shock of rare violence. For some the shock is over (i.e. they have secured their medium-term financial future), for others not (they are looking for funding which they may or may not find) but they are all at the same point: they are down and don’t know if they are going to get back up, how they are going to get back up, how long it will take or what they will look like when they get out.
An expected crisis…or almost
Facing a major crisis in the airline industry in 2020 or 2021 that will result in a large number of bankruptcies and a concentration movement does not surprise us. You don’t have to be a visionary to see it coming last year and less than a year ago Cartsen Spohr, the CEO of Lufthansa announced that there would soon be only 12 major airlines left in the world.
However what nobody saw coming, however, was of course the cause of the crisis. Where everyone saw a crisis of overcapacity caused by low-cost carriers and the need for these young airlines to grow at all costs, it is in fact a virus that has brought the sector to its knees. Then, of course, there will be the question of overcapacity, low-cost and mass tourism, and this is already happening. The virus was just a boost.
In the end, the situation was partly expected. What was not expected was that everyone was affected, whereas in the scenario that seemed most realistic at the time, only those that owed their success to high volumes and low prices would have really suffered.
The world used to be divided into 3…but that was before
As we have often written, winter was coming and the important thing for the airlines was to know how to get out of it. We talked about it for Air France, for Lufthansa and even if today, with hindsight and knowing what we know, we can smile, the logic was clear.
Before there were :
- Well-run and growing airlines
- Airlines that were struggling to catch up but seemed to be safe.
- Airlines in trouble
Then there would be :
- The predators
- The preys
- Those that are too good to be prey and not good enough to be predators and run the risk of being downgraded to a “regional” or “continental” airline.
Today everyone is on the same level. Whereas in the ‘before’ world the state of the airline before the crisis suggested that it would play a role in the consolidation process, today this is no longer the case. When everyone has fallen, it’s not about where you fell, but how fast you get up
On a European scale, it would have been easy to bet that Lufthansa Group or IAG, to name but a few, would play the predator, that Air France-KLM would have wanted to join the game but did not necessarily have the means to fulfil its ambitions, and that Alitalia or even TAP would have been the obvious prey.
The survivors Fair
Now nationalised, Alitalia has risen from the ashes draped in a virginal dress! In a ruined market, yes, but the 11 years of haphazard management and the 3 failed restructurings are forgotten. The Italian airline is restarting with no debts and a cash contribution of 3 billion euros from the State.
A real miracle, especially as the European authorities have allowed this to happen with a benevolent eye, which was not easy before the crisis.
Good news, as strange as it may sound, for Air France KLM: the airline needed two things: cash and a thorough restructuring to stop being a victim of its culture (well…more at Air France than at KLM) and become an agile airline! At this time it had the cash but it will be used to survive and not to invest (although there is nothing to suggest that there will be good opportunities in 6 months or a year) and an ideal context to justify a big sweep. There is no longer any need to be embarrassed by certain relics of the past such as A380s that it never needed, A340s it had to keep because of the lack of new aircraft arriving quickly, the highly acclaimed Angus Clarke joins in to assist Anne Rigail to better catch her in a pincer movement with Ben Smith and the arrival of fresh blood of possibly very foreign origin is announced in the management. Provided that the state does not shoot the airline in one foot after having treated the other, there is an unhoped-for possibility of a rebound for the Franco-Dutch group at a time when the competition is bogged down.
And this, indeed, while Lufthansa, yesterday’s exemplary and hegemonic model, was struggling to complete its financing plan: the airline found the money and the real question was to know how much its negotiations with the State would cost to the airline. But while some are able to think about tomorrow (provided they make the right decisions), others are still dealing with the immediate consequences of the crisis.
On the US side no Chapter 11 in sight yet except for LATAMThis is the magic wand that allows the worst performer in the class to regain its health, safe from its creditors, and come back to the market all dressed up and dapper, but nothing says that this will not happen.
In Asia, Thai, which was moribund before the crisis, is taking advantage of a similar scheme to recover sheltered from its creditors.
When the modernity of their fleet turns against airlines
Add to this another factor: only yesterday it was fashionable and logical to criticize the airlines that had old and therefore inefficient aircrafts and to praise those with newer fleets.
But when the crisis forces part of the fleet to be retired early or to be grounded for a long time, it is better to take out aircraft with a low residual value and low efficiency than newer, more efficient aircraft. At Air France, even if the release of the A380 means an unpleasant year from an accounting point of view, it is already a gain for tomorrow. We will certainly be talking about the A340 in the near future. Lufthansa is starting with A380s, A340s and maybe some 747s. At KLM the 747 was among the first to be affected. This is better than parking brand new A350s or B787s that have barely been depreciated and are far from being paid off.
Delta, which has always had a policy of keeping its aircraft as long as possible by upgrading only the cabins, will surely have less of a problem with its balance sheet when it has to make the necessary cuts than when it has to do so.American Airlines, which a few years ago took advantage of a “Chapter 11” to give itself a fresh start.
Everything will depend on the ability to rebound
So now that everyone is down it’s not the solidity of before that will make the difference but the ability to bounce back, be agile and seize opportunities.
One example is Air Baltic, which believes that by renewing its fleet more quickly and being more agile it can gain share in its regional market by being faster and more agile than others in seizing opportunities. But generally speaking, if you start with a blank sheet of paper, the one who makes the right choices quickly and executes them best will be able to make up for 10 years of procrastination and bad decisions.
And then will come the time of the bets. Which European airline will be the first to dare to go shopping in Asia, where growth is expected to drive the market in the future, as discussed in this episode of TravelGuys TV?
What about Air France KLM? They can achieve the theft of the century if they take the right decisions, if they execute them well, if the state does not make demagogy on their back, if the French and Dutch stop the sterile quarrels, if… So that’s a lot of ifs but, six months ago, imagining the group in a position to make a move was not a question of ifs. It wasn’t even a hypothesis. In any case, the gap with the “leaders” has never been so small, but there’s no time to waste to take advantage of it.
Photo : duffer by Elnur via Shutterstock
