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High oil prices, pressure on fares, rising capacity: a perfect storm?

Airlines going bankrupt or operating with critically low financial resources have hit the news. And now winter is coming…

Since 2001 there have been 301 airlines going out of business. In general, 95% of all new airlines go bust before they reach the critical mass level of 20 aircraft in the fleet.

Size matters has been LCC Norwegian CEO Bjorn Kjos’ mantra ever since he started his mission to develop a global low-cost airline.

Only in the last two months, six small and medium-sized airlines have been grounded in Europe: Skyworks, VLM, Small Planet Airlines (Germany and Poland), Azur Air, Cobalt Airlines and Primera Air.

Last week, UK-based Flybe reported Q3 results below expectations and the financial markets showed no mercy; stocks stalled and span down 41%.

More capacity

Eurowings has during September got all its 78 ex-airBerlin aircraft into production, for the most part at the maintenance shop for six to eight months before being fit for flight by Eurowings.

easyJet, Ryanair and Laudamotion are opening new bases and pouring more capacity into the German market. Ryanair Sun in Poland has already transported more than 3 million charter passengers, and it will not stop there as Ryanair has seen the upside in the charter and ACMI business.

Will easyJet follow suit into the charter business, and what about airBaltic that plans to spread its wings outside the Baltic countries as it grows its A220 fleet?

Regional Norwegian carrier Wideroe has already tapped into both ACMI and charter with its three new Embraer 190E2 jets and it has an option for 12 more.

CityJet and Air Nostrum are teaming up to be the largest ACMI provider in Europe, both already contracted by SAS to serve its regional network.

Global growth

Boeing’s latest survey on global aircraft and pilot, crew and technical staff demand until 2037 shows a need for up to 2.1 million individuals, 635,000 pilots, 858,000 crew and 622,000 technicians to cater for the 43,000 new aircraft, whereof 75% are short and medium-range single aisle B737 and A320 family aircraft that will be produced and taken into use by the world’s airlines until 2037.

The fierce battle among the airlines takes place not only up in the skies but also on the ground.

As soon as an airline announces it’s going out of business, several of the larger airlines scramble their pilot, crew and technical staff hiring teams to offer new positions to the jobless personnel.

There is a high demand for experienced captains among airlines, resulting in pilots’ salaries in Europe skyrocketing in the last 12 months, with Ryanair setting the pace. A captain can earn up to €200,000 per year plus benefits and a sign-on fee of €20,000, while first officers are paid between €90,000 and 140,000 depending on flight hours.

Until recently the pilots normally had to pay for type-rating and conversion training, without a job guarantee; this has now become more liberal and attractive and down payment schemes are offered by airlines.

Dangerous cocktail

Looking into the airlines’ latest quarterly financial reports, the main cost drivers are fuel and personnel, while unit revenues are under pressure and unit costs are on the rise. This is a dangerous cocktail for small/medium-sized airlines that are undercapitalised and with a limited ability to reduce costs, increase fares and get financial aid. Nor are airlines or financial institutions looking for mergers and acquisitions in segment of airlines.

The results will be visible during the coming six to eight months. There will be more casualties among the small and medium-sized airlines in Europe, and this concern has already reached the authorities in Germany, who require better consumer protection on airline bankruptcies.

It is going to be a tough winter for many airlines.

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