Sudheer Sharma of PT Trustees considers the fall-out from Thomas Cook’s liquidation and why so many airlines are failing

The past 15 months or so have not been kind to the airline industry and its partners.

Profitable airlines have become less profitable, airlines which were less profitable are struggling and airlines on the margin have started to go out of business.

Airlines reliant on state aid and on shareholders with deep pockets are making liberal use of the funding available to them, disposing of non-core businesses and deferring debt repayment where able.

The worst possible news has been the failure of Thomas Cook and its airline following an unsuccessful attempt to restructure and recapitalise the business.

It’s interesting to note that the one profitable division of Thomas Cook was the airline. One can only speculate at the level of losses sustained by employees, consumers, business customers and suppliers.

Other recent airline failures in Europe include:

  • Small Planet Airlines, a charter and leisure operator with subsidiaries in several countries.
  • Privat Air (Switzerland), which had a focus on business and VIP flights.
  • Cobalt, an airline with Cyprus as its hub.
  • VLM Airlines, which used to be a profitable niche operation.
  • Germania (Germany), which had a fleet of 30 aircraft (+25 on order).
  • Flybmi (UK), a vestige of BMI (British Midland International).
  • Wow Air, the Icelandic carrier which failed in March.
  • Aigle Azur & XL Airways France, which failed this September
  • Adria Airways of Slovenia, which failed on September 30

Unlike the Thomas Cook scenario, travellers have in many cases been left stranded and reliant on the goodwill of other airlines to assist them at a financial cost.

Some other airlines with significant fleets are struggling to survive. Many are reliant on the largesse of state owners or private shareholders.

A lucky few have been purchased by competitors and their operations integrated with a larger airline, but with staff redundancies and supplier rationalisation.

Reasons for airline failures

The industry is cyclical. Its cycles comprise boom years, with airlines expanding existing routes, developing new routes and making large orders for aircraft.

Growth brings in new entrants and when the cycle reverses there follows a period of contraction. We are now firmly into this phase of contraction and consolidation.

Airlines are taking steps to deal with capacity and financial issues by pulling out of unprofitable routes and deferring or cancelling aircraft orders.

This period of contraction in Europe arises from the slowing down of European economies, with slow growth forecast to continue for a number of years.

Other factors have compounded the slowdown: rising fuel prices; currency issues; the ability to hedge fuel and currency and the inaccuracy of forecasts; aircraft issues, including the tragedies involving the Boeing 737 Max; and possibly Brexit.

Outcome of an airline failure

Failures cause a myriad of problems which impact upon consumers, employees, airports, other airlines, credit card companies, suppliers and aircraft leasing businesses among others.

In general, passengers are advised to:

  • Check the relevant website set up by the Civil Aviation Authority.
  • Check available flights with other airlines in the hope some may offer flights at a reduced rate – so-called rescue fares.
  • Contact credit card providers if tickets have been purchased using a credit card.
  • Contact their travel agent to arrange an alternative flight if their ticket has been purchased from an agent (in the European Economic Area) as part of a package.
  • Contact their insurer if they have bought travel protection.

Credit card providers

Failures have significant adverse short-to-medium-term consequences for other businesses in the sector, increasing costs and difficulties.

Credit card providers end up bearing a significant proportion of the financial compensation cost of failures via chargebacks since many people make purchases using credit cards.

This is the case for flights, packages and other travel products. Even where packages are protected under the Package Travel Regulations or bond schemes, the regulators and bodies such as Abta can and will direct consumers to seek recompense from the credit card provider first

Credit card providers, understandably, have resorted to a variety of actions to help manage their risk and mitigate the cost of failures. These include:

  • Increasing acquiring charges
  • Asking for cash and insurance bonds, which are expensive
  • Operating rolling reserves, which the user may consider arbitrary
  • Deferring settlement of monies collected for up to 45 days

One acquirer has warned: “It will become increasingly difficult for those in the travel sector to get access to card-processing services, with some facing removal of service entirely.

“It will all come down to risk versus reward. The challenge in card payments is that the reward is constantly under pressure and in travel the risk is on the increase. It’s a perfect storm.”

Sudheer Sharma is a qualified chartered accountant, an advisor to the travel industry and an expert on trusts involving protection of consumer funds. He set up PT Trustees in 2012.