Survival of the Fittest: Why Only the Strongest Airlines Survive
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The airline industry is cyclical, and it continues to remain vulnerable to external factors including economic downturns, geopolitical disputes and even natural disasters. But several man-made factors are killing off airlines in Europe faster than any other external factor, including overcapacity.
In 2017, three large European carriers went bankrupt in quick succession: Monarch, Air Berlin and Alitalia (although Alitalia continues flying to this day). Primera Air, a low-cost, long-haul hopeful, Cobalt Air of Cyprus, Lithuania’s Small Planet Airlines, British regional carrier flyBMI, Germany’s Azur Air, Switzerland’s SkyWork and Iceland’s WOW Air have also recently collapsed. In fact, we’ve lost so many European airlines over the past 24 months that passengers are increasingly checking on the financial stability of an airline prior to booking for fear the company may no longer be flying by takeoff time.
Overcapacity has driven out the weaker players, while at the same time, the failures have triggered a new wave of consolidation.
Ryanair CEO Michael O’Leary warned that the European airline industry faced more consolidation and bankruptcies while recognising his own airline recorded its first quarterly loss in five years earlier this year, following ‘unsustainable low-fares’.
In essence, there are simply too many airlines flying too many seats to the same destinations — without enough passengers.
Will we see a European airline collapse over the next few months? It’s unlikely. In summer, airlines tend to be cash-rich given the sudden increase in travel demand. But come late-September, the cracks start to show in weaker players that may not have secured enough bookings for the upcoming winter period. Airline executives for more fragile carriers determine the amount of cash needed to carry the airline through the quieter winter period where demand lowers and they can struggle to break even.
For operators such as Monarch Airlines, overcapacity was a mere contributor in a flawed business model for a viciously competitive 2019. Monarch was present in both the low-cost airline market and the leisure airline market, while failing to be a market leader in either. The airline faced fierce competition from both sides and collapsed amid its flawed strategy.
If overcapacity heats competition in Europe up to unsustainable levels, an airline’s exposure to the oil price can often be enough to send it over the edge.
Over the past 12 months, the global state of aviation — not just in Europe — has been widely determined by the oil price. It’s wiped off profits for some airlines, while completely killing off others. If weaker, smaller airlines were able to survive 2017, oil decided their fate in 2018. Fuel costs have consistently topped the list of expenses for most of the world’s airlines, and Brent crude prices have risen over 55% in the past year — with oil recently soaring to record highs after crude prices hit a four-year high of $82.16, the highest level since November 2014. As a result, the International Air Transport Association (IATA) cut its outlook for airline profitability for the current year by 12% from an earlier estimate.
In the oil-rich Middle East, Emirates Airline said that, “Fuel remained the largest component of the airline’s cost, accounting for 33% operating costs”, last year. Similarly, Qatar Airways said that the airline may, too, consider a fuel surcharge on tickets, to compensate for the higher oil price.
IATA forecasts that this year, the fuel bill for the world’s airlines will be $206 billion, accounting for 25% of operating expenses at around $70 per barrel Brent.
Finally, an additional large contributor to determining the survival of a carrier includes the effects of the pilot shortage that’s already being felt this year. Multiple larger airlines have not invested enough in cadet pilot training programmes in order to ensure an influx of new pilots to replace all those retiring. Consequently, larger airlines are actively poaching pilots from smaller airlines by being able to offer higher salaries. Not only are the smaller airlines suffering from losing a significant portion of their pilots, but many are not planning for staff shortages, which causes flight disruptions and hefty EU261 compensation bills.
For passengers, ensuring your travel insurance policy covers ‘airline failure/collapse’ is key to protecting your booking from the overcrowded European aviation climate.
Featured photo by K.C. Alfred / Getty Images.
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