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The real reason airlines go bust

Flying on fumes


 

When airlines go belly up, the reason isn’t always clear. And it’s no wonder — with billions lost, ruined travel plans, massive job cuts, vaporized shareholder investments and unpaid creditors, airlines aren’t always up front with what’s gone wrong.

This past December, the International Air Transport Association revised its forecast 2008 loss for the global airline sector downwards to US$ 5 billion. Regarding 2009, IATA Director General Giovanni Bisignani lamented, “We face the worst revenue environment in 50 years … most regions are expected to report larger losses.”

So why start an airline? Given the industry’s state, it is a wonder anyone would. Amazingly, we recently learned that Zoom Airlines may re-launch even though it failed last August, leaving thousands of passengers stranded or holding worthless tickets.

Why do these situations keep repeating themselves? Many people getting into the sector mistakenly think it’s only about flying shiny jets with a sexy image.The problem is, running an airline has more to do with the steak than the sizzle and high-flying CEOs who have not understood this principle invariably find their airlines quickly grounded.

With entry barriers low (i.e. meet the minimum operating and licensing requirements, foreign ownership limits, and have adequate capital to get airborne), the sexiness of the industry will continue to attract newbies. And, unfortunately for passengers, there are no government or industry regulations that can arbitrarily bar new entrants just because we’re had our fill of failures.

Provided regulatory prerequisites are met, by raising $50 million you can be airborne. You’ll need approximately $30 million to acquire three vintage Boeing 737-300 aircraft, another $5 million for two spare engines, kick in $15 million for initial working capital deficit needs, and presto – you’re flying the dream.

The rationale for each new venture is “aunique plan”. While there are elements of luck and timing to any successful venture, the key to being profitable remains centred on the same fundamentals.

The primary causal factors behind many airline failures include:

  • Strategy quickly devolves due to loss of focus from initial plan
  • No sustainable competitive advantage
  • Under-capitalization
  • Over expansion or too rapid expansion
  • Flying the wrong routes and/or not flying the right routes
  • Mismatch between a route, aircraft type used, and flight frequencies
  • Poor revenue management neglects sustainable, long-term profitability
  • Poor cost management
  • Poor labour relations, critical in a highly unionized sector
  • Wrong management team or decision making that is too centralized

The question remains as to why so many airlines fail to adopt these basic business principles. It sounds cliche, but it’s mainly because the shine of the wings blinds their perspective. They are either ignorant of the required fundamentals, or choose to ignore them at their own peril.

The problem is that their peril is eventually shared with you and me. It is our travel plans that get flushed down the coach class lavatory along with our hard-earned money.

Are there danger signs we can watch for to avoid airline meltdowns? Reading airline financials may help, but you have to know what you are looking for and it only works with airlines that publish data. And, while accounts of aircraft seizures and unpaid creditors are certainly precursors to a likely shutdown, the time gap between such events and an airline closure is narrow.

The above caveats noted, there are some precautions the average traveller can take to avoid collateral damage. For example, avoid paying with cash, debit or cheque. At least through credit-card companies, travellers have some rights of recourse.

As well, consider using a travel agent. In BC, Ontario, and Quebec, regulations are in place to protect travellers who book through a certified agency (this includes both traditional and online agencies). Even if travelers do not reside in one of those jurisdictions, the general value of using an agent is that they are often privy to industry buzz circulating around potential airline problems.

Realistically, the best most of us can probably do is adopt the old adage, “If it sounds too good to be true, it probably is”. You cannot keep flying to Vegas for $39 and expect the airline to be around long.

– Robert Kokonis, President of AirTrav Inc.


 
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The real reason airlines go bust

  1. Right. We love the cheap pricing but we’ll scream and yell if the airline goes under.

  2. You cannot keep flying to Vegas for $39 and expect the airline to be around long.

    Nice choice, Vegas. But, then, The $39 fare payer is on his or her way to gambling away much more than 39 bucks for almost-zero return. The likelihood of cashing in with a flight for that $39 gamble is far greater than what will be achieved at the roulette wheel.

    Inherent in the low fare is the gamble that we don’t fly and we lose our money. If you want a guaranteed flight, pay the premium on a more expensive, stable airline. Pretty simple.

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