Tim Robinson

Written by:

Tim Robinson

Associate Director

‘Another One Bites the Dust'

  • May 2019
  • 5 minutes

Those were my first thoughts as we heard the unfortunate news of WOW Air’s collapse at the end of April, less than eight years after the business was founded by Skúli Mogensen. Last November we thought perhaps Icelandair may step in, but after a few rounds of failed talks with Iceland’s flagship carrier and a private equity house with an interest in budget airline investment, it turned out there was nobody left to ‘Save Me’.

WOW follows a growing cast list in recent times which include Jet Airways, Flybmi, Monarch, Air Berlin, Primera and Cobalt.

We have also seen a handful of airlines announce profit warnings in 2019, with the likes of Tui, Lufthansa and Norwegian citing the worldwide grounding of their Boeing 737 Max 8s as a key factor.  

The airline industry has endured stormy skies before with 9/11, ash clouds and drone disruption to name but a few. Yet for individual operators who continue to come ‘Under Pressure’ from market forces and see their numbers in the red, the volatility of the current environment offers little comfort in this context.

What is causing these continued failures?

Despite air passenger numbers in Europe growing by almost 5 per cent in the first two months of this year, there are still simply too many available seats in the marketplace, driving down price as airlines strive to surpass breakeven load factors.

A recent BBC News article highlighted IATA data showing that the number of flights in Europe has risen more than 40 per cent over the last decade, which really brings home the stark truth of over-capacity. It’s all coming at a heavy price as airlines have extended routes satisfying the desires of consumers who ‘Want It All’. Industry observers say the aggressive pricing strategy of certain players demonstrates a determination to put weaker competitors out of business in order to achieve longer term gains.

Revenue growth also continues to be constrained by consumer spending and the inevitable impact Brexit delays are having on consumer confidence.

From a cost perspective, rising aviation fuel costs caused by rising oil prices continues to be one of the main reasons quoted for failures. We are seeing crude oil currently at a six-month high and analysts expect prices to stay higher over the summer. Perhaps forecasts for some failed business models were not realistically sensitised or hedging strategies were not in place for fuel costs? UK operators are likely also being hit by unfavourable exchange rates throughout Brexit negotiations, especially those willing to take on some unhedged risk.

With all this in the mix it really is no surprise that it is a fight for some to ‘Keep Yourself Alive’.

What can travel businesses do?

Supplier failure causes major disruption for both tour operators and agents. The immediate aftermath can be labour intensive: dealing with the repatriation of customers and ensuring the fulfilment of their ATOL responsibilities. Future affected passengers must be rebooked on reasonable alternatives or refunded. Where there is a failure of key flight partners, entire programs and products have to be reconsidered. I can only imagine the headache this must cause businesses, and the speed with which they respond is ‘A Kind of Magic’.

The financial cost of supplier failure is significant too, of course. Recovery of costs is not simple and depends on methods of payments, insurance policies in place and those costs that can be reasonably passed on.

Businesses must however be agile and those that thrive take a ‘Don’t Stop Me Now’ outlook and are adept at dealing with these increasingly frequent crisis events.

‘The Show Must Go On’

It will be interesting to see any developments and reforms that arise from the ongoing Airline Insolvency Review following the government decision to repatriate all stranded Monarch customers including flight-only bookings.

I think it is a safe bet to predict that there are likely to be more casualties to come. Some may survive through acquisition and it’s perhaps likely we will see consolidation of the European market similar to the way the US market already has. We have already seen Thomas Cook put its airline on the market following a recent strategic review; others are likely to follow.

As we get towards the end of 2019, and perhaps have some Brexit certainty, I wonder which carriers will be singing ‘We Are the Champions’?

For more information, please get in touch with Tim Robinson.

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