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Airlines Airline insolvencies 2018: Europe's airlines in crisis?

  • VLM Airlines

Several airlines were forced to file for bankruptcy or cease operations in the last months. AVIPEO.COM analysis reasons for the problems.

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The list gets longer and longer: SkyWork, SmallPlanet in Poland and Germany, VLM, Azur Air Germany, Primera Airlines and Cello Aviation and Cobalt Air were all forced to cease operations or file for bankruptcy in the last weeks. We want to take a closer look at the reasons for the failure of the airlines.

Overview: failed airlines in 2018

Rising oil price

During the last twelve months, the price of a barrel of oil rose by over 35% from under $60 to $85. This is accompanied by a massive increase in the price of aviation fuel. Besides personnel costs, aviation fuel is one of the largest cost centers for airlines. Smaller airlines are particularly affected by price increases, as they rarely engage in fuel hedging. A fuel hedge contract is a futures contract that allows airlines to establish a fixed or capped cost, via a commodity swap or option. Large carriers like the Lufthansa Group, AirFrance-KLM or the IAG Group can keep the cost of aviation fuel stable and lower in this way. As smaller airlines in Europe often operate older aircraft with higher fuel consumption, the impact of higher fuel prices is even heavier compared to larger airlines.

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Chaos in the sky above Europe

The summer of 2018 was marked by chaos in the sky. Strikes by air traffic controllers, overcrowded airports and airspace led to considerable delays and flight cancellations. Europe's largest airline, Lufthansa, was forced to cancel 18,000 flights this summer, according to board member Harry Hohmeister - equivalent to a two-week closure of our largest hub in Frankfurt. While larger airlines can compensate for these losses, smaller airlines in particular are hit hard by flight cancellations and compensation fees.

Falling ticket prices

Especially on routes with many competitors, small airlines are exposed to strong price competition. Large low-cost carriers try to force competitors out of the market with very low and sometimes unprofitable prices. Smaller airlines often focus only on niche routes or leasing their own fleets to larger airlines. Since niche routes are associated with increased costs and considerable uncertainties in demand, the risk of failure is particularly high for smaller airlines.

Other negative factors

In addition to the uncertainty surrounding the Brexit, which could hit British airlines particularly hard, other factors also play a role, such as delays in delivery by aircraft manufacturers Airbus and Boeing. The delayed deliveries mean that airlines cannot expand their fleets as planned.

What will happen next in Europe?

The increasing price of oil will also put pressure on other airlines in Europe. Smaller airlines are increasingly being forced to review their business models. Without a critical mass of aircraft and a profitable network of routes, it will be difficult to fly economically successfully. There is already speculation that other airlines, such as the long-haul start-up Air Belgium or Flybe, are experiencing considerable economic problems. Ryanair CEO Michael O'Leary also expressed concerns in an interview with the website airlines.de that the competitor Norwegian Air Shuttle might face financial problems due to the rise in oil prices.

One solution for airlines can be the wet-lease business: The airlines fly for other, usually larger, airlines and provide the aircraft and crew on the flights. This procedure offers the smaller airlines the advantage that they can concentrate on a reliable flight option and are not responsible for ticket sales. In the USA, where the airline market is already much more consolidated, this approach is widespread today. There are hardly any smaller airlines here that operate their own independent routes.

WDL Aviation aircraft operating flights for Easyjet
WDL Aviation aircraft operating flights for Easyjet © WDL Aviation

In addition, smaller airlines will increasingly join forces in the future to achieve a critical mass. One example is the recent cooperation between Cityjet and Air Nostrum. Adria Airways also tried to expand its fleet with the takeover of Darwin Airlines, but failed. A merger of different airlines can lead to synergy effects and cost savings.

What do you think?

We would like to discuss this exciting topic with you! What do you think the future holds for aviation in Europe in the coming years? Write us a comment under this article! 

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