Hardly a week goes by these days without hearing stories of stranded travelers as airline after airline go under or suspend operations. The struggle is not restricted to low cost or legacy carriers alone. In the last year we have had Air Berlin go under, Alitalia struggle, Cathay Pacific lose a huge amount of money, and Malaysia Airlines become so unprofitable that it has cut all its long-haul routes. Even recently the mighty Etihad has hit financial woes, and it seems a merger with rival Emirates is almost inevitable.
Looking at low-cost carriers during the same time-frame, the situation is no less ugly; Primera Air has gone under, Monarch in the UK has disappeared, and Cypriot Cobalt has recently ceased operations. So, the question arises in an age when passenger numbers are growing, why are so many airlines struggling? Digging a little deeper, it is clear that even though both low cost and legacy carriers are struggling it is for very different reasons.
Legacy Carrier Struggles
Even though the demand for air travel seems to be going up, most of this is for economy and non-premium cabin travel. The demand for premium cabin travel has remained relatively the same. When you consider that the bulk of airline profits are made from premium cabins, the lack of growth in demand coupled with increased competition is key to understanding why some legacy carriers are struggling.
The growth of the Gulf carriers has placed intense pressure on European and US legacy carriers. As they started to offer a great premium product, other carriers have had to respond and start to up their premium cabin game. Unfortunately, this cost significant amounts of money. Airlines that have upped their premium game have started winning passengers from other legacy carriers who offer an inferior hard and soft product. The second a legacy carrier starts to lose its premium cabin passengers, it is in deep trouble indeed.
The low-cost models rely on cutting operating cost to a minimum and adopting a point to point business model. The companies fly from hundreds of destinations to other destinations often from smaller cities and airports. This means that even though overall demand for air travel grows the bulk of low-cost destinations see little change in demand, and here lies the problem with most of the smaller low-cost carriers that have gone under.
Smaller low-cost carriers cannot dominate an airport and drive down costs as Ryanair can with Stansted STN. Instead, they try and compete on more popular routes, but it is then very difficult to compete with much bigger competitors on price alone since they have the capacity and financial power to drive down prices even lower.
Couple that with a relatively flat demand on most routes, and very quickly it is clear that the low-cost market is relatively saturated. While they may be thousands of passengers per day looking to get from London UK to Paris France, there is a much smaller number wanting to go from Aberdeen, UK to Nantes, France, and the number of people wanting to fly that route is not going to see much growth over time. Essentially for short haul destinations, there is an oversupply of low-cost carriers, and that is why quite a few are struggling.
While it may seem alarming that airlines seem to be going bust every day, this is pretty normal, and while the news seems dramatic at the time it is relatively common place. Looking at the history of aviation you will find that hundreds of airlines have gone bust over the years, as some carriers adapt, and some don’t to an ever-changing business environment.