The air aviation industry suffered another fatal blow on Monday when the directors of the British low-cost airline carrier, Flybmi declared bankruptcy and put the company under court administration. This is a follow-up hit to the collapse of Germany’s low-cost counterpart Germania Airlines earlier in February and fears exist about potential continuation of this trend.
The bankruptcy trend was somehow foreseen by Ryanair’s Chief Executive, Michael O’Leary, in an interview given last year over the woes of the air aviation industry. Since then, several low-cost carriers filed for court administration. The beginning of the bankruptcy trend was made in October 2017 when the British low-cost carrier Monarch collapsed. It was followed by the German counterparts Air Berlin and Azuz Air, Scandinavia’s Primera Air, Lithuania’s Small Planet Airlines, Cyprus’ Cobalt and Swiss SkyWork Airlines. The Italian representative Alitalia and Norwegian Air Shuttle were also having liquidity problems but they were assisted by their respective governments, thus nearly escaping bankruptcy.
Reasons behind Airline Carrier Bankruptcies
The International Air Transport Association issued a report recently where it reveals that more than 40% has risen the volume and frequency of trans-European flights as compared to the previous decade’s scores. This trend nonetheless did not protect the air aviation industry from the shocks of the external business environment. On the contrary, it facilitated the consolidation of flight oversupply conditions in the industry, at a time when passenger demand for new routes and trips remained relatively stable, if not declined due to reduced spending capabilities – another by-product of the 2008 financial crisis.
External shocks entail among other things rising fuel costs, passenger compensation schemes and environmental footprint charges. For example, the head of the Hungarian low-cost Wizz Air, Jozsef Varadi, claimed that E.U. passenger compensation rules and rising fuel costs facilitated the progressive elimination of low-cost companies from the air aviation industry. The former Managing Director of Monarch, Tim Jeans, also cites the rising carbon footprint fees as another source of evil. Low-cost airlines have to pay thousands of euros in carbon taxes to compensate for their weekly flight schedules.
A third factor lies in the absence of economies of scale in low-cost air carriers with limited budgets. Contrary to industry leaders such as the German Lufthansa, British Airlines or even Easyjet and Ryanair, smaller companies do not have the fleet capacity or the ability to negotiate better airport fees. This structural weakness precludes small-scale operators from establishing economies of scale conditions, thus driving operational, maintenance and fuel costs downwards.