Friday, 6 October 2017

Turbulent Times for the Airline Industry

Today’s post aims to present somewhat of a round-up of a number of pieces of news coming from the Airline industry in recent weeks (and months) because, recently in particular, the divergence between those in the industry doing well and those that are not seems to be growing at a particularly rapid rate. Recently we looked at the trade battle that is developing between Boeing and Bombardier, but in this post the focus will be on the recent collapse of Monarch, Air Berlin, and the troubles at Ryanair, although it will be discussed that not all airlines are feeling the heat in this marketplace, with certain players making significant moves to take advantage of their competitors’ downfall or change in strategy.

Firstly, the two stand-out stories from the airline industry are worth analysing because the effect that they are having will be felt for some time. In August of this year, Air Berlin filed for bankruptcy after its leading shareholder, Etihad Airways, withdrew financial support for what was then Germany’s second-largest airline. This was Etihad’s second withdrawal from the European airline market in the space of a year, leaving the Italian airline Alitalia with no alternative but to file for bankruptcy as well. With regards to Air Berlin, it is being reported today that 1,400 of their employees, those who have been retained as the airline is carved up amongst its competitors, are being threatened with dismissal, with all of the carrier’s ground staff being relieved of their posts by the end of this month. As for Alitalia, the carrier is still being carved up, although the rumoured takeover approach from Ryanair last month may be some way off given Ryanair’s current issues, which we will get to shortly. However, for some, the fall of these regional carriers is a consequence of overcapacity, and their failures offer an opportunity to reduce the negative externalities that result from the fragmented European model, although the proponent of this view is the person who will likely benefit the most – Lufthansa CFO, Ulrik Svensson, stated that ‘all forms of consolidation are good’. If Svensson’s analysis is correct, that ‘current developments in Europe are also a positive sign’, then the recent failure of Monarch airlines will only embolden his claim.

Monarch Airlines, a company which has been providing air travel since the late 1960s, collapsed dramatically earlier this month, leaving thousands of passengers stranded abroad. It has been suggested that the Government, along with the Civil Aviation Authority, had to return over 11,000 stranded passengers, although other sources suggest that the combined total was more like 23,000 at a cost of £60 million – the move is being labelled as the U.K.’s ‘biggest peacetime repatriation’. It should come as no surprise then that there is a lot of anger surrounding this collapse, with many questioning why the British Government did not ‘prop up’ the airline like the German and Italian Governments have done with Air Berlin and Alitalia (which continue to fly on ever-reducing schedules). However, the business reality is that Monarch was failing for quite some time, and the impact of Brexit and the impact of terrorism upon tourism played crucial parts in the demise of this near 50-year old airline. The consolidation that Svensson mentioned is going ahead at a rapid pace, with larger carriers enveloping the assets of these failing airlines, airlines which have been argued were primed for failure and may, according to best estimates, be the only ones to suffer that fate. This is because other airlines are better protected against the variances within the tourism and energy sectors, although that does not tell the full story, with one established member of Europe’s airline fraternity suffering from major internal issues which are affecting both their operational standards and their PR profile.

Ryanair, operating since 1984, has risen through the industry so that it now stands as Europe’s largest carrier, carrying over 116 million passengers every year. However, Ryanair has been making the headlines recently because of the recent spate of cancellations that resulted from the firm ‘messing up’ with the planning of their pilot’s holidays. According to reports, the firm could face a £18 million compensation bill which will likely grow seems as the airline ‘plans to cancel 40-50 flights every day for the next six weeks’. The disruption, however, has brought to light a number of problems within the firm between it and its pilots, with one pilot describing the company as being run like a ‘communist regime’. In order to attempt to soothe these concerns, supposedly beleaguered boss Michael O’Leary has recently written to pilots suggesting that the firm will increase their pay beyond that of their rivals, and also offer better job security, apparently to no avail. What effect that this current crisis, of sorts, may have upon the alleged deal for Alitalia will be interesting to monitor, but it is also worth noting that not all of the airline industry are suffering.

At one end the very smallest of firms are doing very well in and around Europe, whilst EasyJet today announced that its full-year profits will meet or exceed forecasts, although this was tempered with the caveat of the effect of the Brexit-induced collapsing of the Pound. Norwegian Airlines, who recently launched their new long-haul services from London, flying to new destinations like Singapore and New York for a fraction of their competitors’ prices. Also, there are new entrants to the business at the top table, with new, more economical jets being commissioned for the larger airlines like British Airways. So, whilst the airline industry is experiencing mixed fortunes, the effects may be significant, depending upon one’s perception.

Whilst ‘consolidation’ helps the larger market players face less uncertainty within an already crowded marketplace like Europe, the reality is that less competition in this particular sector will usually result in increased prices for consumers, with the more consolidated American sector proving that correlation in recent times. However, whilst the prices for consumers are important, the working conditions of staff in a more restricted marketplace are of more concern. The treatment of Air Berlin staff is an issue, irrespective of the financial position of their employer, but Ryanair’s treatment of its pilots raises serious questions about the employment standards in an industry that the public put their safety in the hands of every day. The development of the stand-off between Ryanair and its pilots will be important to monitor, because the result is that Europe’s largest carrier is also the host of legions of disaffected, overworked and underpaid pilots and staff, which has a number of massive ramifications. As the industry heads towards ‘consolidation’, the usual effects of ‘consolidation’ need to be remembered, because it is usually the public that pays the price.

Keywords – Airlines, Monarch, Air Berlin, Ryanair, Alitalia, Pilots, Employment, EasyJet, U.K., Business, Bankruptcy, @finregmatters

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