The heart of winter is nearly upon us, and the demise of several airlines.
- Primera Air goes bankrupt, stranding passengers AND crew abroad
- Cobalt Airlines runs out of cash and fights pilots who try to repossess planes
- Avianca Brasil asks for government help to stop their panes being repoed
- FlyBe sells itself for only $25 million dollars, a vast airline network for the price of a modest yacht.
- The Indian domestic market grounds to a halt as tickets reach only 2 cents in an insane buying frenzy.
- WOW Air cancels multiple routes, desperate to find a buyer in Frontier’s Indigo Group after Iceland Air leaves them out in the storm
- Norwegian Air Shuttle returns several jets back to its lessors to save up cash
You might start to see a pattern here, many of the airlines that have gone bankrupt or are suffering financial difficulties are actually low cost carriers.
WOW Air cancels route to Chicago
WOW Air, the Icelandic low cost carrier known for its insane black Friday deals, has canceled yet another route to North America. This comes on the heels of the news that their route to Los Angeles from Iceland has to stop in Edmonton to refuel, due to the wrong type of plane placed on the route (As they focus on India).
With the Chicago route being cut, this means WOW Air’s year-round route network to the US now includes daily flights to Baltimore, Boston, and Newark, and 4x weekly flights to Detroit.
Why are all these low cost carriers suffering?
The problem is, if your customers are buying ultra low tickets then you have very little room for price fluctuations in your variable costs.
A quick summary for those who didn’t do commerce 101:
- Fixed Cost: Items that are always the same cost no matter what. Planes, staff, landing fees, administration costs.
- Variable costs: Items that are never the same cost, or fluctuate depending on the market. The most common example is Fuel.
An airline might always get the same amount of passengers on the same route, using the same plane, crew and more, but their profit will make it or break it depending on the price of fuel.
And boy has fuel had a rollercoaster ride!
As you can see from the graph above, the price of fuel dropped dramatically back in April 2015. This allowed for low cost carriers to expand rapidly and quickly monopolize routes. Because tourist customers shop of price, they were able to swallow up most of the flag carriers business (Causing airlines like British Airways to reduce their soft product or Etihad to start charging for seat selection).
However, when the price of fuel rose in April 2017 (just two years later), these airlines were forced to suddenly pay a lot more. Some of them might have reached the scale that allows them to shoulder the burden (such as Ryanair and EasyJet), have a more fuel-efficient fleet (such as Norwegian) or have plenty of cash on hand.
Flag carrier airlines, on the other hand, had the very lucrative business market to tap into. By having a large business class and suites (Like the new suites that are on Lufthansa’s new 777X) they are able to attract a customer who is not price-sensitive. In fact, as we have mentioned countless times, most airlines don’t make a profit off economy.
So much that an A380 that was in full economy configuration (800 seats) would STILL not make a profit.
Does Norwegian buck this trend?
Norwegian is a very special case. They have been doing many things right that have allowed them to survive, despite industry leaders saying they won’t last the month.
Norwegian has performed the following steps:
- A fleet of many fuel efficient 787 Dreamliners
- Focusing on routes that are monopolized by British Airways, stealing their business and scoring huge market share
- Forcing their competition to downgrade their service to compete
They even have IAG trying to buy them out multiple times…
But Norwegian has only been able to expand because of the low fuel price over the last few years and is starting to feel the pressure. They have started to cancel routes and reduce their fleet size.
Only time will tell if they are able to survive the harsh winter of 2018/2019.
To answer the question that was proposed in the title. Low-cost airlines are here to stay. There is a market appetite for cheap air travel, and the market is simply in its early stages. Come a few years and there will be fewer market players sharing a bigger pie, and the flag carriers of old will be kicking themselves.
What do you think? Are low cost carriers here to stay?