Why Do Airlines Collapse?

2018-2019 were troubling years for aviation. Multiple carriers have gone out of business. But for some more established carriers, revenue and passenger loads are strong. However, competition from low-cost carriers and price sensitivity result in airlines failing due to small market movements. Input costs like fuel to wages may vary sharply, leaving a carrier in dire straits.

Jet Airways (India), Iceland’s WOW and Thomas Cook have all gone bust. Northwest to Continental were absorbed by Delta and United respectively. Air2there, a New Zealand carrier closed in July 2018; Air Costa Rica closed in July 2019 after two years; Air Link, an Australian carrier closed after 47 years in operation; NextJet, a 16-year-old Swedish carrier closed in May 2018 and so too Sparrow, another Swedish carrier, declared bankrupt in June 2018. (And that’s not the full list).

But why did they collapse?

One of the most difficult things in running an airline is projecting accurately the costs involved. Very little, in terms of overheads, is fixed. Fuel costs are a significant expense for airlines and variations will make budgeting really tough. Fuel costs constituted 23.5% of total expenses in 2018. Any variation upward could “break the camel’s back”. Reuters says labour costs have surpassed fuel in 2016. IATA estimated airlines lose USD5 billion globally due to rising employment costs.

In many markets, supply exceeds demand. Overcapacity means the weakest will not survive. An example of that was Monarch in 2017. Flights may have grown but fares have dropped – putting pressure on margins.

Rapid growth of networks, fleet and services is usually another reason. It doesn’t mean one does not grow but growth has to be in a measured way. Primera Air is an example of too fast too soon. Then there is ATC (air traffic controllers) strikes which ruined carriers operating on a shoe string.

Getting new investors to avert an adverse situation could be a problem. When talks break down, airlines have no choice but to close – WOW Air, Cobalt and Thomas Cook are examples. The trick is to build a cash-pile in good times, grow measuredly and try to project several scenarios on costs and revenue over very short-term periods. Then perhaps one could reasonably fly through a turbulence.

What about MAS? That’s another story!

Reference:

1. Joanna Bailey, Why Have So Many Airlines Collapsed In The Past Year? https://simpleflying.com/

2. James Asquith, The Biggest Airlines To Ever Go Bankrupt www.forbes.com