Many years from now, when we take a look back at the history of aviation, we will definitely remember the 2010s as the peak of time of when many airlines filed bankruptcy. Since 2007, 284 airlines have had to stop their flights and the total figure so far for 2019 has reached 24.
Some of airlines that discontinued their flights especially in the last 2 years appeared in the news while a majority of them quietly left the market and took their place in the dusty pages of history. Let’s explore the reasons that led many of these airlines to an unfortunate end…
One of the most important components of airline operations is the correct analysis and management of costs. Very few of airline overhead costs are fixed expenses. Fuel prices are the major cost item for airlines and the worst thing is that fuel prices are constantly changing due to incidents that occur around the world. Unstable changes in such an important expense line item make the budget unmanageable.
Statistics show that in 2018, fuel costs constituted an average of 23.5% of the total cost of airlines. This rate was calculated as 32.3% in 2012 and the estimates for the end of 2019 reveal that 25% of total expenses are expected to be fuel costs.
In many countries, labor costs are as unstable as oil prices. Official figures show that labor costs outpaced fuel costs in 2016 for the first time in aviation history (22% labor - 21% fuel). The IATA`s latest financial report also shows that airlines are projected to lose US$ 5 billion globally due to increasing employment costs.
The European Union`s rigid stance on passenger rights compensation also creates additional pressure on airlines. Delays and cancellations now translate to tens of thousands of dollars of compensation for airlines. Furthermore, additional environmental and emission taxes imposed on flights by some countries, such as Germany and France, cause an increase in airline overheads. This results in new deficits that need to be covered in their annual cost sheets. Airlines with relatively less financial strength are incapable of taking action in the midst of these unexpected changes as well as regulatory changes and consequently they are unable to survive.
Demand and supply imbalance
Supply and demand imbalance problems have occurred in many aviation markets, primarily in Europe. There is a significant imbalance between the size of the market and the number of airlines needed and the number of airlines available. In other words, there are more airlines in the market than required. All airlines are seriously struggling to maintain their market share. For example, according to CAPA data, in 2018, the seven largest airlines in Europe constituted 55% of the market, compared to 82% in North America. According to the IATA, flight traffic in Europe has increased by more than 40% in the last decade. Simultaneously, prices have fallen and have started to exert negative pressure on the profit margins of airlines. As a result, this outlook has disrupted current financial statements.
Europe, however, is not the only market where airlines encounter fierce competition. Jet Airways could not resist the rise of low-cost airlines in India. South African Airways, one of the oldest airlines in Africa, just barely survives because of state aid (citizens` taxes) as they face competition from foreign airlines that are pouring into their country.
In general, the growth in flight networks and growth in the fleet and services of airlines has a positive indication, provided that such growth is achieved within a controlled manner. When companies attempt to perform many activities simultaneously and in a short period of time as per their growth strategies, they lose control of their financial balance and enter serious turbulence. At that moment a free fall can occur and the airline begins to sail to the point of no return. The best example is Primera Air.
Primera, a low-cost airline, stormed into the market and was taking firms steps forward. Rather quickly they started a significant acceleration in new destinations and new aircraft. They even started providing low-priced transatlantic flights. However, during this process, expenses and costs were increasing and the anticipated income level could not be achieved in return. Eventually, the managers threw in the towel and discontinued flight operations, which had recently become complicated, and flights were completely stopped.
Iceland`s WOW Air also started to serve passengers at very low prices for transatlantic destinations. The pricing system, which many passengers called “too cheap to be true”, was the beginning of the end for the airline.
Strikes and compensations
The last few years have also been very difficult for airlines due to labor unrest. Increased fuel and labor costs, as well as strikes and action by various European airline personnel, airports and towers, posed critical problems for many airlines.
In 2017, there was a 300% increase in strikes in France and 39,000 flights were cancelled/delayed just in the month of May alone. The situation was similar in Germany, England and many other countries. Any flight that was delayed or canceled as a result of a strike caused serious damage to airlines and during this process airlines were required to arrange hotel accommodations for impacted passengers, meet their needs and pay them large amounts of compensation. Above all, the cost of losing customer trust is detrimental to say the least. With the irreparable damage of negative customer stories shared among family, friends, social media, it is no surprise that reputations were quickly destroyed.
Even if larger airlines were able to maintain high profit margins and a financially sound bottom line, weathering the storm so to speak and able to more easily tolerate the impact of such an occurrence, it was very painful for smaller airlines to overcome this situation.
What will happen next?
Thanks to the European Union and its airline liberalization program, larger airlines such as
IAG, Lufthansa and Air France-KLM are trying to find ways to compete in the market with low-cost carriers such as Ryanair and EasyJet. Since the beginning of the new millennium, Europe`s largest airlines have been gradually transforming into larger airline groups with multiple reputable brands. The consolidation such as Ryanair`s takeover of Laudamotion and Malta Air is one of the potential results that we will witness more of in the future, especially in the European aviation market. The number of such cases must increase as time goes by, because the supply surplus in the market is not sustainable.
Bankruptcy decisions often arise when the airline needs an investor and such an investor cannot be obtained. We see similar processes experienced both with WOW Air and Cobalt. Even if the negotiations with investors seemed likely to break the deadlock, the airlines were forced to close their doors when the negotiations ended.
The volatility of oil prices still continue. Regardless of the short-term fluctuations, the general view in the sector is that prices will continue to rise for the next five years. With the expectation of an increase in the potential number of strikes of airlines flight personnel, air control tower personnel and airport ground handling personnel, as well as the Brexit process that concerns Europe overall, the positions of the airlines in the market are expected to change significantly.
The strength of the US Dollar is an important factor as well that increasing the costs, the downward trend of the European economy, decline in GDP growth rates in Germany and the UK and the recession in Italy are serious concerns for the future of the airlines. European airlines are on full alert before the upcoming winter season. Together as a global audience, we`ll see what will come to pass