Why Airlines fail. Low cost airlines drop like flies in 2018

 

2018 Has seen an unprecedented wave of medium-small airline collapses or near collapses.

Back when Monarch failed a couple of years ago, the industry warned more would follow for the very same reasons. It’s the same reason new airlines aren’t being set up.

If you take any business opportunity the first rule is simple, no matter what the business is. You never launch into a saturated market.

You have to have a USP – a genuine, relatable, believable, useful, desirable Unique Selling Point. Something you do has to be different to anything anyone else does, or has done, and certainly nobody else can be doing it currently.

Ideally rule three, is that whatever you do, it has to be only something you can do, it cannot be easily copied and offered by a potential competitor.

It’s exceptionally difficult to do any of the above in the airline industry. The rare success stories are the only airlines who’ve managed to exploit the one area nobody else had bothered with – long haul low-cost.

WOW came close to extinction in the last few weeks, having over extended itself. Then losing the financial advantages of being in Iceland, as economic circumstances outside of its control made things untenable, it lost the only real edge it had. It’s USP was selling cheap seats from as far as Delhi, via Iceland, to the US and Canada.

Norwegian has sailed very close to the wind – fortune favours the brave they once said, and of course the British SAS special forces motto, ‘who dares, wins’, seems to be one they may just prove to be true.

The way Norwegian has operated, and continues to be operated, frequently raises eyebrows. Every possible financial trick has been used to keep the airline flying, but it was given respectability only in 2018 when IAG tried – and failed so far – to buy it, followed hard on the heels by offers from Lufthansa.

This years failed airlines, like Primera Air, ignored rule one – don’t launch into a saturated market. They couldn’t attract the passengers, they weren’t able to offer a USP, and when things went wrong they made no effort to be open and honest about it.

Even worse, what they were doing was already being done by Norwegian. Not only that but at this stage in the game, airlines like BA, Virgin Atlantic, Joon and Eurowings had adapted their fare structures, to offer genuinely low prices in economy, for those willing to travel with hand baggage only. Other airlines were quickly doing the same.

Lufthansa was already deep into Primera territory with Eurowings too, offering low risk, familiar brand travel with a global loyalty scheme in Miles&More. How did Primera ever think all this was going to be easy to compete with?

In the European core low-cost market, airlines like Small Planet suffered a Monarch like fate.

They were deliberately undermined by RyanAir moving into their local markets, pressed by Wizz across eastern Europe and clever, USP savvy AirBaltic with its shinny new and exceptionally popular, Airbus A200 series.

Monarch, pressed by its competitors, on every route, even managed to raise its passenger numbers in 2016 but couldn’t charge enough money to make a profit.  EasyJet and RyanAir undercut it, as did Jet2 and TUI, waiting, for its inevitable death. Small Planet suffered a similar fate in 2018, squeezed out by predators.

Airlines like Lufthansa Group, IAG, easyJet and RyanAir are able to prise massive discounts and lease deals from the manufacturers that nobody else can. Fewer than 100 aircraft is unlikely to see you survive for any length of time without real financial backing in the billion dollar scale.

It’s not only finance either – in this day and age pilots are in short supply. In the US heavy signing bonuses are being paid to attract pilots and in Europe there’s a shortage of around 1-2% growing every year. Airlines like BA, Virgin and easyJet have all reinstated or set up their own training programs.

The US market is now heavily consolidated, so much so it’s been said that even in a free for all environment politically, regulators would be very wary about any of the large airlines buying out anything smaller. Yet rumours persist that Frontier and Spirit are ripe for joining forces, endlessly pressed by costs that only combined scale can assuage. It’s being said that jetBlue and Hawaiian would offer a unique set of advantages as a combined airline.

The one to watch is jetBlue. They’re making waves. They’re challenging the joint venture between Delta-Virgin Atlantic and AF-KLM. Not to stop it as that’s exceptionally unlikely, but to extract concessions in terms of gates and slots that’ll let it operate lower cost flights from the US to Europe – the first US airline to do so. And that will place even more pressure on WOW, Norwegian and Icelandair.

The market in the far east is more regulated, the Chinese and Hong Kong markets subject to continued government scrutiny and manipulation behind the scenes, and in Hong Kong vested interests are deeply entrenched and unwilling to let go.

Despite this the vast Hong Kong market its being prised open, Cathay Pacific has had to restructure Cathay Dragon and it’s own offering to compete.

Air Asia and Air Asia X have transformed the overall market space in South East Asia, Lion Air in Indonesia has done the same there. Singapore Airlines was almost under siege from low cost carriers but turned it round by creating Scoot and re-marketing it’s high end offering.

The one place low cost still hasn’t cracked properly is Japan. It’s huge aviation market with its two main airlines in effect control a duopoly, owning the low cost ‘competition’, ‘low cost’ carrierPeach and Vanilla Air are even being merged.

These countries don’t have real aviation liberalism at their core, so the pressures aren’t the same. They’re as likely to be trimmed or damaged by government action – especially in China – as they are real commercial pressure.

So, European airlines live in a unique atmosphere, the most open and competitive in the world. It’s quite possible that open liberalism may in the end be anti-competition, as the biggest survive and the expense of the weak. An irony, as that is surely the very opposite of the intent. Yet the long theorised result of capitalism uncontrolled, is that eventually there will only be two companies globally providing everything. Is it just a matter of time?

 

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