Friday, September 12, 2008

The Cycle of Aviation

The airline business is cyclical, always has been always will be. It's why airlines like Court Line went down in the 70s, Laker in the 80s, Air Europe in 1991… and many others in between.

According to what I've been reading on the web the head of XL believes there are dark forces at work, but since the airline industry was deregulated this is what you get because aircraft manufacturers need to sell more and more aircraft. It causes over capacity, which needs a growing or at the very least a stable-ish market to survive. As soon as things start to turn down then the inevitable happens...airlines and tour operators go bust - those that are vertically integrated are especially vulnerable.

The fact is that forward bookings are now the biggest issue. Airlines have survived the summer because advance bookings were not affected by the loss of confidence coupled with the realities of the credit crunch. This is not now the case; people are not booking travel like they were. Watch over the coming weeks as we start to get a rash of advertising from easyjet, Ryanair et al as they attempt to buy market share.


Anonymous said...

I can't help but wonder whether the whole business model that the low-cost airlines have been using can no longer stand scrutiny.

Knowing how banks are always the first to panic and get their money back out of "at risk" businesses, I think we can expect to see several more low-cost holiday firms and airlines going under in the next few weeks.

Richard Havers said...

I think that holiday firms may well be a bigger risk in the short term than airlines. As the squeeze gets tighter travel is one of the first things to go. People in this atmosphere will not be rushing to book a holiday.

The role of the banks is an interesting one. They very often own the assets, the aircraft, and there's something of a necessity for them to keep airlines flying. When airlines go bust there's suddenly a glut of used aircraft on the market and how to get them sold or leased is a huge headache.

Ken Dyer said...

Richard, as you’ve said before, it is inevitably cyclic…when times are good aviation booms, when it’s bad, it suffers. Of course with deregulation the peaks and troughs become more exaggerated. The problem has always been that when times are bad, holidays are amongst the first things to go…not good if you make a living out of leisure travel.

You’ll recall one of my older posts regarding Zoom. They were simply the start of what was inevitable. In this last week we have seen Futura of Spain fail (amid surprisingly very little publicity bearing in mind how many Brits were left stuck in Spain as a result), immediately followed by Seguro Holidays (who rather unfortunately had paid all their money to Futura for their flying just prior to Futura going under), Air Bee (an Italian charter airline, probably unknown to most, unless you were unfortunate enough to have booked with Newmarket Holidays) and finally on Friday, XL. The combined effect of this is to take some 50 aircraft out of the European charter market representing some 10,000-15,000 seats (or holidays) per day!

For the next few weeks many airlines throughout Europe will gain, simply in recovering the stranded XL passengers. But what happens in October…and then of course Winter will be here. Forward bookings are down and whereas those who had previously booked with XL may well ease pressures by rebooking with other airlines, it is still going to be a tough time, and sadly I fear more airlines and operators will fail.

There were no dark forces in XL’s downfall. Their business model worked fine in a buoyant market, but simply failed when the fuel prices rocketed and the market took a sharp downturn. Their debt was insignificant compared to MyTravel's some years back...but then the market was good and the banks were willing to provide support.