More Airlines ‘will fail’ in 2019…

Southwest is so huge it’s impossible to imagine it would fail as it leads the way in how low-cost airlines need to be run

Avalon, one the worlds biggest leasing companies, yesterday reiterated what this site and other analysts have been warning – 2019 is going to see more airline casualties.

Profits are in sharp decline – Icelandair posted losses of $55m it reported yesterday, as one example.

Already this year Flybe have had a near death experience, Germania has ceased trading, and even RyanAir posted a loss.

What’s causing the problems?

The first is huge demand – but it’s matched by too much capacity.

The second is that ticket prices are simply too low because capacity levels are too high.

Thirdly, even high-end ticket prices are too low, and not making enough extra money to make up for low economy prices.

IndiGo lives in a bubble of hyper-expansion in India, but eventually it will reach saturation and then the fight really begins

Aircraft are often full, but that doesn’t mean they’re making enough money to break even on those flights, let alone make money.

The result is that unless the airlines have vast capacity – the likes of Southwest in the US and easyJet and RyanAir in Europe, and can generate enough cash to fight lower cost competition, there’s no way to keep going.

At a certain point the capacity of an airline is so great that even selling at just below cost, its ancillary charges for luggage, food, premium boarding and so on, can tip the balance of a passenger journey into profit.

Small airlines just can’t create enough revenue from the ancillary sales to make that work for them often because the costs of running them are higher than the revenue gained, simply because of their smaller size.

SmallPlanet was eaten alive by predator airlines

Predator airlines are also a core problem. RyanAir especially finds an interesting destination nobody has bothered with except for example the late SmallPlanet Airlines, in Poland. Then it sets up a local base in competition and undercuts them until they’re forced out.

Monarch suffered the same curse. It wasn’t big enough, despite lifting its passenger numbers to record highs it couldn’t make enough money from them on routes where as many 5-7 other airlines were pressing it.

Once Monarch collapsed it’s notable that most of its competitors cut services back on the routes they’d competed on, lifting ticket prices.

The near death of WOW has shown again that costs and ticket prices have to be matched. Low cost airlines without a significant fleet – and that these days is around 120 aircraft – can’t sustain sudden fuel price hikes and low prices.

WOW has been savaged in order to stay aloft, it operates just 10 A321 and a single A320neo, gone are its A330’s (leased from Avalon and now stored) and its 50+ fleet ambitions. Reality has been a painful pill to swallow. But at least it’s still here, even if it is as a member of a house of low-cost airline brands with Indigo Partners in the US.

WOW had to give back all of its A330’s and half its A320 series fleet to stay afloat

Another factor for low-cost operators is when they start charging more money, passengers start wondering why they bother and settle on airlines with a better service for similar money. The point at which that happens is remarkably narrow.

The mainstream airlines we call legacy carriers, have adapted to deal with low-cost carriers surprisingly well. From BA to Virgin Atlantic and United to American, price structures have adapted, seat numbers on aircraft have changed – 772’s now have up to 11 across when they used to have 9 in economy, for example.

BA re-configured its economy seating on the Gatwick based 772’s to compete with Norwegian

Yet there’s also a growing demand for premium seating – not so much the elite end First Class, but certainly business and premium economy. Another newer element is Economy+ where you get a standard seat but more leg room and better services.

The one airline everyone is watching though, is Norwegian. The vultures have been circling and the jackals are wearing it down bit by bit. The question is can it survive? It’s not big enough in theory but it has powerful institutional investors who don’t want to see it fail, and recently reined in its flamboyant founder and chairman Bjorn Kos. It may live to fight another day or two.

Bjorn Kos, not quite flying as high these days

The cost of all these airline failures is, in the end, the very competition that capitalism seeks to create, eroding the competitors down to so few that they actually stop having to compete. The airline industry is Darwinism at its worst. It’s not just survival of the fittest – it’s survival of the most ruthless.