Airline failures and Consequences

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The past 15 months or so have not been too kind to the Airline Industry and its Partners. Profitable airlines have become less profitable, airlines which were less profitable are struggling and the airlines on the margin have started to go out of business. Airlines reliant on state aid and on shareholders with deep pockets are making liberal use of the funding available to them coupled with disposing off noncore businesses and deferring debt repayment where able. 

The worst possible news has been the failure of Thomas Cook (and its Airline) this week following an unsuccessful attempt all Summer to restructure and recapitalise the business. It is interesting to note that apparently the one profitable division of Thomas Cook was the Airline which was being separated for a sale. The failure of the entire Thomas Cook business which includes the Tour Operating and Travel Agency businesses is expected to cost the exchequer £600m. One can only speculate at the level of losses which will be sustained by employees, consumers, business customers and suppliers. Some 150,000 passengers have been stranded and many more deprived of their forthcoming holidays. The Civil Aviation Authority have mounted a major repatriation exercise by chartering aircraft and it is expected to take two weeks to bring all travellers home. The problem has been compounded by the authority’s inability to find a way to utilise the Thomas Cook airline fleet which was grounded instantly.

Notable failures in Europe of airlines that were apparently well established have been:

· Small Planet Airlines A charter and leisure operator with subsidiaries in several countries.

· Privat Air (Switzerland) which had a strong focus on business and VIP flights.

· Cobalt an airline with Cyprus as its major air hub.

· VLM Airlines which used to be a profitable niche operation.

· Germania (Germany) It had a fleet of 30 aircraft (+25 on order).

· Flybmi (UK) A vestige of BMI (British Midland International). They had significant routes from the UK to Europe.

· Wow Air an Icelandic carrier failed in March despite other airlines being interested in acquiring it

· Aigle Azur & XL Airways France have failed this month of September

Unlike the Thomas Cook scenario in many cases travellers are left stranded and rely on the goodwill of the other airlines to assist them generally at a financial and personal cost.

There are it appears a number of airlines around the world with significant fleets aircraft that are struggling to survive. As noted above, many of these are reliant on the largesse of their state owners and private shareholders. A lucky few have been purchased by competitors and their operations have been integrated into the larger airline but with staff redundancies and supplier rationalisation.

Some reasons for these Airline failures

The Industry is cyclical and these cycles comprise boom years with airlines expanding existing routes and developing new routes coupled with large orders for new aircraft. Such growth brings in new entrants and as is the case when the cycle reverses there follows a period of contraction. We are now it seems firmly into this phase of contraction and consolidation. Airlines are taking steps to deal with capacity and financial issues by pulling out of unprofitable routes and deferring or cancelling aircraft orders.

This period of contraction in Europe arises from the slowing down of European economies with slow growth forecast to continue for a number of years. Some other factors listed below have compounded the slow down in the airline sector:

· Rising fuel prices

· Currency issues

· Ability to Hedge both fuel and currency and Inaccuracy of forecasts.

· Aircraft issues – The tragedies behind the Boeing 737Max have quite rightly had a significant impact on all aircraft manufacturers and the way they manufacture aircraft

· Brexit?

The outcome of an airline failure

In general, the advice rendered following the announcement is fairly typical and Passengers:

· Advised to check available flights with other airlines with the hope that some airlines may offer flights at a reduced rate, so-called rescue fares, in light of the circumstances.

· Advised in the case of Thomas Cook to check the relevant website set up by the Civil Aviation Authority who it appears has a well-planned repatriation programme in place – but then they had time to prepare.

· Whose tickets have been purchased using a credit card are advised to contact their credit card provider to check for refunds of the ticket cost.

· Who purchased their ticket from a European travel agent (within the European Economic Area) as part of a package were advised to contact their travel agent to arrange an alternative flight as they are protected by Package Travel Law.

· Who may have bought travel protection, or whose credit card terms may include such protection, may be entitled to claim compensation and assistance due to delays or travel disruption.

Such failures cause a myriad of problems which impact upon Consumers, Employees, Customers, Airports, Other Airlines, Credit Card Companies, Suppliers and Aircraft Leasing businesses amongst others.

Credit card providers

These failures will have significant adverse short to medium term consequences for the other businesses in the Travel sector and for new entrants with increasing costs and difficulties.

Credit card providers and the banks they rely upon are one specific example.

Credit card providers end up bearing a significant proportion of the financial compensation cost of such failures via chargebacks since many people now make their purchases using credit cards. This is the case for both flights, packages and other travel products. Even where packages are protected under the Package Travel Regulations or other bond schemes, the Regulators and bodies such as ABTA can and will direct the consumer to first seek recompense from the Credit card provider.

Credit card providers have therefore resorted to a variety of entirely understandable actions to help manage their risk and mitigate the cost of such failures. Some of these are:

· Increase acquiring charges to higher and higher levels

· Ask for cash and insurance bonds which are expensive

· Operate rolling reserves which from the user’s viewpoint are sometimes considered arbitrary

· Defer settlement of monies collected for a number of days. The author has seen 45 days

As an acquirer said “It will become increasingly more difficult for those in the travel sector to get access to card processing services, with some facing removal of service entirely.”

“It will all come down to risk vs. reward – the challenge in card payments is the reward is constantly under pressure and in travel the risk is on the increase. It’s a perfect storm.”

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