The failure of XL Airways marks the beginning rather than the end of turbulence among airlines. Ian Taylor predicts pain ahead
Airlines face the greatest economic challenge in the industry’s history, with British Airways boss Willie Walsh suggesting 30 carriers could collapse by the end of the year.
Italian flag carrier Alitalia was on the cusp of failure this week. It was caught between the resistance of conservative prime minister Silvio Berlusconi to a takeover by Air France-KLM and trade union resistance to cuts in jobs and wages.
An Italian international airline will emerge from the meltdown, of course, just as Swiss International Airlines emerged from the collapse of Swissair in 2001. Either a slimmed-down Alitalia will merge with domestic carrier Air One, or a start-up airline Air Italy will be formed from its remains.
Other carriers will pile into the Italian market. EasyJet and Ryanair will add services and capacity using aircraft withdrawn from the UK, Spain and Germany, and Lufthansa will establish its first hub outside Germany and Switzerland at Milan Malpensa in February – flying to a range of European cities.
Rumours of other failures abound. Probably only British Airways, Air France-KLM, Lufthansa, easyJet and Ryanair are secure among the major scheduled airlines. Flybe is the strongest regional carrier and Thomsonfly, Thomas Cook Airlines and Monarch Airlines hold firm in the leisure market. All other airlines are at risk, with a significant number likely to fail.
One side effect will be a reversal in the fortune of regional airports, ending the boom of the past decade as carriers collapse or close bases. Long-haul services are likely to focus on Heathrow until things improve.
Consolidation will accelerate through fire-sale acquisitions and failures on the one hand and mergers and anti-trust immunity agreements on the other.
BA has targeted Iberia and a tie-up with American Airlines. Lufthansa – which owns Swiss – is in talks with SAS, has agreed to buy Brussels Airlines, is expected to buy Austrian Airlines and has first option on a takeover of BMI.
Air France-KLM is tightening its partnership with the merging Delta Air Lines and Northwest Airlines. Ryanair will resume its pursuit of Aer Lingus.
Without consolidation, at least one of the major US carriers can be expected to fail. The one bright spot in world aviation is in the Middle East, where the high oil price is an advantage and carriers such as Emirates and Etihad Airways continue to expand. Etihad announced orders for 100 new aircraft this summer and aims to quadruple in size by 2020.
The Middle East aside, carriers have been principally squeezed by two factors to date – the high fuel price and the credit crunch.
Up to June the major failures involved recently launched long-haul carriers – business-only airlines MAXJet, Eos and Silverjet, and Oasis Hong Kong Airlines. The failure of Zoom Airlines at the end of August showed the crisis had fed through to the leisure sector and brought the demise of the latest attempt at budget long-haul flying.
The collapse of XL Airways and failure of Spanish charter carrier Futura this month put leisure travel at the centre of the crisis. But, worryingly, the industry had a good summer. The recession has not really hit yet.
That is about to change. The UK economy is now almost certainly in recession. Add in a record rise in food prices, a 77% increase in utility bills this year and rising unemployment, and a fall in demand appears inevitable.
This need not mean a stampede away from annual holidays, but multiple short breaks will become a memory for many.
With the exception of Ryanair, most aviation bosses expect demand for what they call PFP (purely for pleasure) flying to plunge. That is why easyJet, Flybe and Germany’s Air Berlin are focusing on business travel – a more-resilient market.
Ryanair’s strategy is to fill seats at the expense of trashing prices, make up the shortfall from ancillary sales and be prepared to lose money if it means driving rivals out of business. Yet even Ryanair will depend on emerging from the downturn sooner rather than later.
Unfortunately, the outlook is deteriorating. First, hopes that the oil price has passed its peak appear misplaced. The price per barrel fell from a record $147 in July to $90 in mid-September, only to return to $120 this week. But even at $90, the price only matched that of eight months ago and left aviation fuel at close to double what it cost a year ago.
Second, the relative weakness of the UK economy – partly due to its over-reliance on financial services – has analysts predicting a sharper recession here than elsewhere. This is already reflected in the declining value of sterling, making contracting by holiday companies and travel to many destinations more expensive.
Third, the deepening financial crisis means credit will be tighter than ever despite the $700 billion bailout of the banking sector by the US government and a further £100 billion injected by the Bank of England. Discussion among economists now focuses not on whether recession can be averted, but a depression avoided.
In addition, while the events of the past week may stave off financial collapse, they will have to be paid for. Taxpayers, which means holidaymakers, will foot the bill. There is a lot of pain ahead.
Europe’s struggling airlines
Alitalia: entered bankruptcy protection in August, €1.2 billion in debt and racking up losses. Italian takeover consortium pulled out of a deal last week. Temporary air operating licence expires October 2, but could be revoked earlier. Cash for fuel may run out any time
Olympic Airways: up for sale and €2.6 billion in debt. One-third of the carrier to be liquidated. European Commission demanded repayment of €850 million in state subsidies. Unions pledged to fight sell-off
Spanair: withdrawn from sale by parent SAS Scandinavian Airlines in summer after a year without attracting a buyer. Suffered fatal crash, with 154 deaths, at Madrid airport in August
Major airline failures
- MAXjet Airways: December 2007
- Oasis Hong Kong Airlines: April 2008
- Eos Airlines: April 2008l Silverjet: June 2008
- Zoom Airlines: August 2008
- Futura International Airlines: September 2008
- XL Airways: September 2008
Airline consolidation
- Austrian Airlines: for sale
- Brussels Airlines: accepted Lufthansa offer
- Iberia: plans merger with British Airways
- SAS: in talks with Lufthansa
- TUIfly, Thomas Cook-owned Condor and Lufthansa’s Germanwings: in merger talks in Germany
What aviation experts say
“We are in the worst trading environment the industry has ever seen. We have seen 30 or so airlines go bust this year and it would be fair to expect a similar number of casualties over the next three to four months.”
Willie Walsh, chief executive, British Airways
“Aviation is contracting. A lot of capacity will disappear.”
Tim Jeans, managing director, Monarch Airlines
“Even at the most superficial level, 2009 will be worse than 2008. There is a widening economic malaise and this will have an impact on demand for air travel.”
Chris Tarry, aviation analyst, CTAIRA
“Many European airlines will cease trading this winter. Nobody can match Ryanair’s low fares.”
Howard Millar, chief financial officer, Ryanair
