Why So Many Airlines are Going Bankrupt - YouTube

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The last five years have the most the consistently profitable and financially successful years

ever for the world’s commercial airlines.

Including the 2019 forecast, they’ve earned more than $160 billion in combined profit

over this period.

With a world economy more robust and connected than ever, the aviation industry is flying

high… or at least most of it.

In these same five years, the world has seen some extremely high-profile airline collapses

and the frequency of these seems to only be picking up.

The trend truly began in 2017 when Monarch, a well-respected British leisure airline with

fifty years of history, went belly-up.

The very same month, Air Berlin, a massive airline with over 8,000 employees and 100

planes, also ceased operations.

2018 then saw the end of Primera Air—an airline that generated buzz but seemingly

flew to close to the sun in its final days with its low-cost transatlantic flights—and

Cobalt Air—a small Cypriot carrier.

2019, though, was the year of slaughter.

Wow Air, a huge player in the low-cost transatlantic market, stopped flying.

Aigle Azur, France’s second largest airline, stopped flying.

Xl Airways France, a long-existing transatlantic airline, stopped flying.

Adria Airways, a mid-sized Slovenian airline, stopped flying.

Then, after fifty years of history, Thomas Cook Airlines suddenly too stopped flying

in what entered the record books as the largest UK airline collapse ever.

Worth noting is that the aforementioned airlines are not cherry picked names.

It’s certainly not the definitive list of airline collapses in the past three years,

but they are most all the highest-profile ones, and with these, there are two interesting

patterns.

Firstly, every single one of these airlines is based in Europe.

Secondly, and perhaps more strangely, every single one of these airlines, with the exception

of Wow Air, stopped flying in either the month of September or October.

Neither the pattern in location or times of these collapses is a coincidence.

There are very good reasons behind these trends.

For the timing, you see, in general airlines’ most profitable season by far is summer since

that’s when there’s the most demand.

There are certainly exceptions to this rule.

For example, an airline flying between the Northern and Southern Hemisphere a substantial

amount, like Qantas, typically sees more more consistent month-to-month profits as it benefits

from the demand in both the northern and southern summer.

The seasonality of demand also varies significantly by region.

For example, here are a few years of overall month-to-month passenger figures in the US.

You can see that there’s a clear peak each August and a clear valley each February, with

smaller, secondary peaks each year for Thanksgiving and Christmas.

If you take a look at Europe’s month-to-month figures, though, you can see how relatively

stable the US’ traffic is.

Relying much more on leisure travel, which is highly seasonal, European airlines have

to cope with winter demand being almost half that of summer demand.

Airlines in the US, though, carry more business travelers, in proportion, who tend to book

more consistently throughout the year and therefore they don’t have as much excess

capacity in the winter.

There are even regions like Asia-Pacific that see nearly no seasonality in their demand,

but the main thing to know is that Europe has highly seasonal traffic which means the

timing of when its airlines make their money is highly seasonal.

For example, take a look at Ryanair’s quarterly gross profit graph.

In 2018, they made $901 million from January to March, $1.4 billion from April to June,

then an enormous $2.1 billion from July to September.

The fall was then definitively their weakest quarter with only $877 million made.

Essentially, they made 3/4 of their profits in half the year.

The problem airlines then have, though, is cashflow.

For the busy summer season, airlines will get paid for tickets in the months leading

up to those flights.

Therefore, most of the money for that season will get to them between March and August.

It’s therefore a season that can typically sustain even the financially weakest airlines.

Come September, though, bookings start to dry up and therefore so does cashflow.

With that, airlines will start to struggle to pay off their debts, let alone the costs

for fuel and other operating expenses.

Once an airline starts to fall behind on their debts, it tends to be a vicious cycle.

Quickly, they might have planes repossessed, which means they have to cancel flights, which

means they have to pay for hotels and penalties and for rebooking and pretty soon, the airline

won’t have enough money to operate and will be declared bankrupt.

In Europe, unlike the US, there is little opportunity for businesses to restructure

once bankrupt so, for the most part, that means they’re closed down immediately and

indefinitely.

As the aviation industry is so volatile and capital intense, these bankruptcies can happen

impressively fast.

In Thomas Cook’s case, there had been hints of its financial difficulties for months,

but at the end of August, it seemed the company would likely be saved by a buyout deal.

It only truly became clear that the airline was headed towards its end the very week of

its collapse but still, everything went on as normal from an operational standpoint.

On September 22nd, at 9:40 pm, the airline tweeted in response to a customer, saying,

“our flights and holiday operations are operating as normal.”

That was true… at the time.

All the flights were taking off, they were still selling tickets, everything was normal

from the public perspective.

Behind closed doors, though, things were not ok.

Five and a half hours later, in the early hours of the morning of September 23rd, the

company’s last tweet went out saying, “we are sorry to announce that Thomas Cook has

ceased trading with immediate effect.”

All around the world, at the very moment of their declaration of insolvency, flights were

quite literally boarding, crews onboard, planes fueled, ready to go.

With the company now gone, though, everything had to stop.

Those crews were not longer employed, that fuel wouldn’t be paid for, the planes were

no longer owned or leased by the airline, everything stopped.

Of course, once an airline collapses and its flights are cancelled, there is no longer

an airline to rebook passengers onto other flights.

In most cases, passengers are just out of luck, but in the case of the UK, their Civil

Aviation Authority essentially takes the place of any UK airline for the weeks following

its collapse.

The CAA will either rebook passengers onto another airline or just actually run their

own flights.

Of course, the CAA doesn’t have their own fleet of planes.

Rather, they have a number of airlines around the world essentially on retainer for anytime

they need to run repatriation flights.

This includes plenty of charter operators like HiFly, Atlas Global, Wamos Air, and more,

but perhaps the most unique aircraft used by the CAA was a Malaysian Airlines a380.

The airline dedicates some of its a380’s to charter operations and so, the day before

Thomas Cook’s collapse, when it became clear that the end was nigh, the a380 flew empty

all the way from Kuala Lumpur to Manchester.

It landed a couple minutes past midnight on September 23rd, just a few short hours before

Thomas Cook was officially declared insolvent.

As this and plenty of other aircraft pre-positioned even while Thomas Cook flew its last flights,

the CAA was able to start flying its repatriation flights the same day and many passengers were

only a few hours delayed, even after their airline went belly-up.

The Malaysian a380 was assigned to fly flights from Palma de Mallorca, but part of the difficulty

was that, from Palma, Thomas Cook had flown an enormous quantity of flights to an enormous

number of destinations in the UK—London, Cardiff, Birmingham, East Midlands, Manchester,

Newcastle, Glasgow, and Belfast.

Of course, it’s much more complicated to find eight small planes than just one large

plane, so that’s what they did—they found the the largest passenger plane in the world.

Every flight the a380 flew ran just the two hours from Palma to Manchester and then from

Manchester, buses ran to Glasgow, Newcastle, East Midlands, Birmingham, and London.

Using this system, with just one aircraft, the CAA was able to run up to three flights

a day from Palma to the UK with capacity for nearly 1,500 passengers—the equivalent to

almost seven Thomas Cook a321’s.

This whole process went on for weeks, making for a lucrative payday for the world’s charter

companies and an expensive bill for the UK government, but it certainly is easier than

having hundreds of thousands of passengers stranded worldwide.

Having a record-breaking airline collapse and then another record-breaking airline collapse

in the span of two years is certainly not normal and it’s certainly not a coincidence.

Part of the problem is that the airline industry has been so robust in the past decade that

it has allowed weaker airlines to survive.

Out of the bankrupted airlines mentioned at the start—Monarch, Air Berlin, Primera Air,

Cobalt Air, Wow Air, Aigle Azur, XL Airways France, Adria Airways, and Thomas Cook—five

were focused on long-haul, low-cost flying.

This business model is a rather new phenomenon made possible, at least on paper, by smaller,

fuel efficient, long-haul aircraft and low fuel costs but, outside of Asia and Australia,

no airline has really achieved sustained profitability with this model.

Air Asia X, Scoot, and Jetstar are really the only airlines worldwide that have seen

long-term financial success flying long-haul, low cost.

After fuel prices plummeted in 2014, these airlines entered a period of rapid expansion

as they were able to undercut the incumbents prices significantly, but then, in 2017, fuel

prices starting ticking back up and these airlines had a tough choice—they could either

raise prices and lose some of the market share they had built up or keep prices the same

and grow further away from profitability.

Many chose the ladder and, as fuel prices continued to rise, the companies began to

fall.

Many analysts have also suggested that another contributing factor to this spate of airline

collapses is overcapacity.

Somewhat as a result of how successful and profitable the industry has been over the

past decade, airlines have been buying planes like crazy and investors have been funding

airlines like crazy.

For a while, the rule had been that adding more capacity means more profits, however,

the industry has likely found the ceiling to that rule.

This is especially true in Europe’s market where buying an additional plane that you

might be able to fill in the summer means paying for it throughout the long winter too,

when it might sit empty.

What’s for sure, though, is that Thomas Cook will not be the last to fall.

It is only getting tougher to survive as an airline, especially in Europe, and each year,

without fail, another big name too will topple in September or October—the latest victim

in the world’s annual airline culling season.

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