The Long-Haul “Low-Cost Carrier” Business Model in a world awash in cheap money.
By MC01, a frequent commenter on WOLF STREET:
In 1967, Icelandic airline Loftleiðir started offering cheap tickets on Transatlantic flights. Loftleiðir used a lot of what today would be called “funny business practices” to offer such low fares, such as flying the Canadair CL-44, an unsuccessful cargo plane converted into an all-passenger configuration, and not being exactly concerned with punctuality or speed. It was an instant success.
Loftleiðir did not survive the 1970’s, being absorbed by Flugfélag (now Icelandair), but the seed had been sown: the low-cost carrier (LCC) had been born.
Loftleiðir specialized in what the European Organization for the Safety of Air Navigation (Eurocontrol) defines as “long haul flights,” meaning over 4000 km (about 2,500 miles), but success really came to the LCC model on “short-haul” flights (under 1,500 km) and “medium-haul” flights (between 1,500 and 4,000 km), with companies such as Ryanair and IndiGo having now become veritable behemoths.
Low-cost carriers (as defined by IATA) accounted for 44.8% of passenger traffic in the EU, 52.6% in South-East Asia, and 57.2% in South Asia. Legacy carriers, meaning “conventional” airlines such as American Airlines, Air India, or Air France are either feeling the pinch or are joining the fray with their own low-cost divisions, such as Transavia (KLM) and Peach (All Nippon Airways).
However, the long-haul segment continues to remain elusive for LCCs.
But this is the age where credit is cheap, especially for “below investment grade” (“junk”) rated companies. And since low-cost long-haul flights remain an “untapped business segment,” there’s no shortage of starry-eyed hopefuls.
In a recent interview, Bob Crandall, former American Airlines CEO who led the brutal and ultimately successful counterattack of legacy carriers against upstart LCCs such as Laker Airways and PeoplExpress, said that this will be a matter of “who’s going to be prepared to lose the most money,” and it seems current developments are proving him correct.
AirAsia X, the long-haul arm of LCC AirAsia (whose majority owner is Malay godfather Anthony Fernandez), has been bleeding red ink since its much heralded 2013 IPO on the Kuala Lumpur stock exchange, at the lofty price of MYR1.35. It is now languishing at a miserable MYR0.24.
Despite poor financials and declining share prices, AirAsia X remains strongly committed to expansion at all cost.
To give you an idea of what kind of expansion we are dealing with: AirAsia X has ordered an absolutely amazing 100 Airbus A330-900neo models. At a list price of $296 million, this would amount to nearly $30 billion, but large discounts certainly apply.
By comparison, Delta Airlines has just 25 A330neo models on order and Garuda Indonesia a measly 19. How AirAsia X is going to be able to pay for all these expensive airliners, keep them in the air, fill them with passengers, and turn a profit remains a very interesting question.
To this must be added that the AirAsia X order was instrumental in getting the struggling A330neo program off the ground as it risked being choked to death by the smashing success of the completely new Airbus A350 after Airbus sank €2 billion into it. So a lot is running on this fragile deal.
And no discussion of long-haul low-cost carriers would be complete without what I have dubbed “the Netflix of the Skies,” Norwegian Air Shuttle, or simply Norwegian, whose fleet has grown from 6 planes in 2002 to 164 now.
The whole business model of Norwegian is the subject of much debate and rivers of ink, real and virtual alike, so here I’ll briefly focus on the long-haul arm, Norwegian Long Haul.
Norwegian Long Haul presently operates 8 Boeing 787-8 and 11 787-9 (the “standard” and “stretched” variants respectively) with a further 11 on order. And that’s big money: the 787-8 is $239 million each at list price, while the 787-9 is $281 million at list. And that’s just for the aircraft themselves: On top of that there are crews who need to be paid and trained, insurance, fuel, maintenance and all the usual costs associated with running an airline, such as landing fees.
Norwegian has been driven by what can only be called an extremely aggressive expansion policy. Premium-class seats on a standard London-New York flight are just 34% more expensive than their already cheap economy-class seats – well below the industry standard. The addition of those planes has created more capacity. And competition from legacy carriers such as American Airlines and British Airways has further reduced pricing power.
This aggressive expansion resulted in some, shall we say, peculiar financials for 2017 which attracted the attention of Norwegian fiscal regulators and led to truly mind-boggling losses. Bjorn Fehrm of Leeham News estimated in the first half of 2018, Norwegian had an operating loss of NOK 5.2 billion (about $690 million), or 50% of revenue.
To raise short-term liquidity, the company has sold most of its shares in Norwegian Bank (down from 20 to 4.8%) and sold 28 of their Boeing 737-800s and rented them back from the new owners. While this raises a lot of cash up front, it comes with higher costs mid-term, as Alitalia discovered all too painfully. It ended up in the Italian version of bankruptcy in 2017.
How long can a company last in such conditions, even in an financial environment of plentiful and cheap debt, is anybody’s guess.
That is why Norwegian Long Haul is at the center of a complicated game of chess between three of Europe’s largest airline groups: Lufthansa, Air France-KLM, and IAG, the common holding company for British Airways and Iberia.
All of these groups already operate short- and medium-haul LCC’s with varying degrees of success, but long-haul remained off the book until last year when Air France, faced with the realization about a third of its long-haul routes were unprofitable, decided to adopt a low-cost approach to them. The new brand, JOON, started operations in December 2017. And it has already caused a stir.
This year IAG launched operations of a new brand, LEVEL (don’t ask me why all these new brands are written in capital letters), which should become the long-haul “sister” to Vueling. But so far, long-haul services are merely ordinary Iberia flights and the brand operates as just another leisure airline, carrying passengers from Austria to vacation destinations around the Mediterranean using Airbus A321s obtained during the Air Berlin liquidation process.
That’s where Norwegian Long Haul comes into play.
In April 2018, IAG took a 4.6% stake in Norwegian and announced they were “considering” taking over the company. At about the same time, Lufthansa expressed similar considerations.
However, there are several problems with a full takeover of Norwegian, chief among which is fleet compatibility: Norwegian operates a 100% Boeing fleet (though it has some Airbus on order now) while both IAG and Lufthansa operate 100% Airbus LCCs.
Lufthansa shareholders are already fretting: While the core business segments (led by IT and catering) remain highly profitable, the group is in urgent need of reorganization due to having absorbed too many ailing airlines in too short of a time. This reorganization will have to include a deep rethinking of the fleet, which remains “a logistic nightmare.”
So far, aircraft and crews have been juggled throughout the group. But soon painful choices will have to be made. The Lufthansa fleet includes everything from the aging McDonnell Douglas MD11F of the cargo division to the new Airbus A350-900 used on long-haul routes such as Frankfurt-Mexico City. Adding more aircraft types at this point is not an option to be exercised lightly.
IAG already operates a growing Boeing 787 fleet through British Airways and doesn’t suffer from the same brand “crowding” as Lufthansa. A takeover of Norwegian Long Haul would fit nicely in their strategy and allow them to get into the long-range LCC business quickly.
Because time is of essence: Interest rates are already starting to tick upwards as financial markets get squeezed between somewhat less accommodating monetary policies and the rediscovery of risk. Funding for such adventures is starting to get more expensive. And once the present window of opportunity is closed, it may remain so for a long time and with it the possibility to making long-haul LCC’s a viable business model. By MC01, a frequent commenter on WOLF STREET
Converting used passenger aircraft to freighters is a booming business, but overcapacity looms. Read… What’s Going on in the Used Passenger-Plane Market?
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
As a very frequent flyer, the world of airlines and their pricing has become totally unintelligible to me.
I flew this year from NY to Cairo in business on air France for 2k while the NY Paris segment runs 8-9k.
NY to Rio varies from 2 to 8k depending on…… I don’t know.
NY to Bangkok can be dirt cheap.
So besides the flights that I take for family visits and business , my game is to find a business seat at $100/hour.
And sometimes there’s a plethora, sometimes nothing. So i decide on the destinations based on the ticket price.
How can the airlines turn a predictable profit in this environment is a mystery to me.
So if profit is not the endgame, what is?
I would like to say it’s all about ancillary revenue, but then they haven’t introduced that yet for long haul.
I cannot help you on the specific of each company and flight, but the absolute minimum breakeven cost for a standard Transatlantic flight (JFK to Heathrow or Charles De Gaulle) at present fuel and insurance prices on a 787-8 is $75,000. That means the company has to sell enough tickets and cargo space to have 75 grands left after paying sales taxes/VAT and booking fees.
Different aircraft have different breakevens but that’s the best meter we have for the last generation jetliners on long hauls.
Mind that 75 grands include an overhead of 10%, which implies ruthless cost-cutting efficiency: most legacy carriers have far higher overheads and Air France has long been notorious for them.
Ryanair, Easy, Lufthansa and IAG are all profit-driven groups, to name but a few, but many companies which have popped up during the last five years seem to have no sound business plan, let alone a path to profitability. Their strategy seems to be to cannibalize their competitors’ sales and then… who knows?
A few of these companies fly older airliners such as 737 Classic’s (often ex-Condor) but most fly brand new models and have hundreds more on order.
I have predicted a bloodbath of epic proportions in the airline business as interest rates continue to tick forward (to stay on theme there’s a boom of Turkish airlines depending on dollar and euro denominated financing) regardless of fuel prices because most markets are completely saturated and we have already seen some typical excesses: see Rossiya flying between Moscow and Barcelona with 747’s while other Russian airlines use A321’s they already struggle to fill with passengers.
The bankruptcies and mergers have already started, but this won’t be a short affair: we are looking at a decade of brutal attritional warfare that will radically change the airline industry.
The rumor is (but I’m not an insider , just a heavy consumer) that Air France is being set for failure by an inside click. The goal being for it to be absorbed by Delta, for the creation of a mega transatlantic airline Delta/AF/KLM run from the US. Delta running the Americas, KLM euro east and AF eurosouth and Africa.
Hence the new canadian CEO and the absurd AF prices destined to undermine their loyal followers.
Dunno. That’s just what is being said .
Delta and EasyJet bid on the remnants of Alitalia. As Delta is a legacy carrier and will immediately begin cost cutting, i.e. layoff superfluous staff and scuttle fleet in order to profit, while EasyJet will promise to do no such thing ;). EasyJet will borrow billions to keep Easytalia afloat and ask for Brussels bailouts when the plan fails.
Obviously the Italian bankruptcy courts will accept EasyJet’s offer, kicking the can down the road a bit.
I can not envision the French government allowing Delta to own Air France, but if they did the labor environment in France will surely doom such a merger.
Judging by what the present occupant of the Élysée did with Areva (now Orano) and what his predecessors did to keep those two living fossils, PSA and Renault, afloat I would not hold my breath. I am part French and heavy-handed government intervention in these affaires is always to be expected.
Air France operates five LCC brands at the moment (excluding Transavia France, operated directly by KLM), including the aforementioned JOON, and none of them is particularly successful. They are guilty of the typical capital sin of running a mixed fleet but without Lufthansa’s positive cashflow from core activities nor Qatar’s LNG and oil money. Over a third of their long haul destinations are operated at loss (35% to be precise) but there’s no sign of those routes being cut.
Air France is basically still operated as it was back in the 70’s: a political tool both at home and abroad. Problem is the world has completely changed.
Since the French government cannot greenlight a radical reorganization of the group, they are bringing in the same kind of “company doctors” that helped run Alitalia further into the ground. Since French politicians tend to be more stubborn and PR conscious than their Italian colleagues expect them to be at odd with the company doctors in under a year.
Yes possibly. I will take here the conspiracy route though again, I don’t know the truth.
But Mr Macron is the quintessential globalist, put on the map out of nowhere by massive orchestrated corporate media campaign, a bit like a no past Obama. Which is extremely unlikely for an old world country like France. But it happened.
What has also been happening for decades if a very inefficient company with huge fixed costs and massive debts, overpaid staff, lazy pilots and poor appreciation for what a customer is (the one who pays the bills).
So if you want to clean house and it has proven impossible, why not burn it down and let Americans take the blame?
We’ve seen stranger things in the past.
National Airlines are not a necessity anymore. Especially for a globalist whose agenda is the destruction of national sovereignty.
Not all business class seats are equal. Plus, airlines like Emirates/Qatar have vastly different wage structures than EU/US based carriers. There is your answer.
Accounting executives have a lot to answer for. Wanting to spend 80 million on a new jet but so long as they make $1 per seat sold it’s all good. Financial ice skating at its best.
It’s all the same in the airline industry regardless of plane size and configuration.
“How do you make a fortune in the airline industry” starts the punchline?
“Easy, start with two”.
Aircraft and airlines are alluring…sexy. Nice machines, fancy uniforms, cute flight attendents, powerful executives, good pay for pilots and executives, decent hotels and per diems (for the majors)….cutting edge everything. That is why people get into it. In reality it’s always a race for the bottom as the flying public’s descretionary income reduces every year. The costs go down and down and down per seat mile, and there is absolutely no way in hell companies make any money on the advertised flights and everyone in the industry knows it. The declining profits started with deregulation, and the economics are papered over with no frills, no space, extra billings, two tiered pay structures, and finally declining maintenance standards.
Yesterday I was reading about the recent Lion Air crash, Apparently, either (or both) the angle of attack indicator and the airspeed indicator had been snagged for the previous 4 flights on the virtually new 737 max, but apparently ‘fixed’ and ‘signed off’. (There is such a thing as ‘no go’ items.) I have seen snags signed off without proper verification just to get machines in the air. Or as one of my first employers said to me in 1976 when I complained about a faulty airspeed indicator, “Goodnight man, if you can’t fly an aircraft without an airspeed indicator there’s no hope for you, is there”? Now for sure things have improved with most operations over the last 40 years, but someone answer this one for me. How is it possible for an airline to price out a pax seat at 2X what a clapped out bus company charges?
The answer is you can’t. Flying public be warned…You get what you pay for. I haven’t flown anywhere commercially for the past 20 years as a passenger and vowed I never would again. But then my son won tickets to an Oilers/Canucks game on December 27th…luxury box, mid-ice, right across from the jumbo, wait service…the works. I bought the airline ticket in September, Air Canada return and all in for about $700 return out of Nanaimo (to Edmonton). So there you go. That will be my last flight, ever. Air Canada should be safe enough I reckon.
Low-cost, budget should never be words used to describe an airline
Interesting piece. There’s a missing segment of the long haul market which a couple of now deceased operators – Maxjet and Silver something or other – tried to tap into, but failed . This is the well healed leisure traveller. Both the two operators named marketed their service as an ‘ all business class ‘ but we only go once a day to New York at 11 am. The business traveller goes when the meeting is scheduled not when the airline goes. But having used Maxjet from the time it started to its demise the fare £1000 or thereabouts return to NYC was a bargain with fab service etc etc. It’s just amazing to me that no new operator has appeared who has worked this out.
Doesn’t seem to be a big enough market for leisure travelers sufficiently affluent who aren’t TOO affluent. If they’re well-heeled enough they hive off into private jets to avoid the cattle-car humiliation of airport security and airline delays.
There is one on the NY Paris segment, called La Companie. All business. Relatively cheap at less than 2k. Always nearly full. The legacy ones charge north of 8k these days which is nonsense at 1k/hr.
Mostly non business people. I don’t know what a private jet would cost but I assume 10 times more. Very few people can afford that.
La Compagnie was absorbed by XL Airways France at the start of 2017 but still operates under its own brand.
It will be interesting to see how the two business models will meld, as XL has long been the carrier of choice for tour operators such as Club Med, Kuoni and Jet Tours.
John Hope – “…having used Maxjet from the time it started to its demise…” Aye, there’s the rub: you can never sell emough seats below cost to make a profit.
– Typos ? I see a mix of two abreviations: LLC & LCC.
Thanks. Fixed. I’m wondering if auto-correct did its magic trick, LLC being such a common abbreviation.
There are actually LCC’s (like Jet Blue) & ULCC’s (like Frontier & Spirit).
I really don’t understand the airline industry is mired by
The threat of new entrants
Enormous Competitive Rivalry
Buyer Power
Threat of substitutes
High(ish) supplier power
So how are these firms raising funds?
I follow a few fashionistas online and Emerates is all the rage with them. It really does look like an upscale travel experience. Rarely do I hear about the cost of the high end, like traveling on Emerates. I know enough to know even the well off like a good deal, so what’s the deal with them.
Also are any of the cheap carriers discounting the high end. I used to travel first class on Continental but never considered it a truly upscale experience. First class made it barely bearable, otherwise it was like the subway with hostesses. Now that I’m a wee bit older, I’d rather stay home than deal with the cattle car.
Emirates has a kickass party bar for business/first on the top deck of a380. It’s the only way to fly really. ;)
Emirates have seat sales on business routes during low season. For example, Cairo/Dubai/NY for around $2500. That’s a great deal… of course, it all depends on the route, timing, departure/arrival airport, taxes and all that.
I’ve flown business class several times, non-stop from Portland, OR to Amsterdam and back. Wow, what a great experience- they call you by name, you get champagne in crystal glasses, you get a little Tumi travel kit, real headphones and a down feather pillow. It’s the only way to fly! I’m spoiled now- I told my husband I just can’t fly international coach! lol. (We have friends at the airline that upgrade us to business class on their employee buddy-pass system).
I think “LLC” should read “LCC” in all but the first instance in this article. Or is this the new internet spelling checkout?
It has always been interesting to me why companies like United, American, Lufthansa, and other legacies have not adapted a more straight forward fleet strategy. Now, I don’t mean all Boeings or all Airbus, like what Continental or American did in the old days. But it would make sense to have long hauls and short hauls be segregated into distinct types.
For example, stick with an all 737 or A320 family fleet for short/medium haul makes sense in terms of commonality. Same with doing either A330/A350 types or B787/B767 types for long haul, and not have a mix fleet of B747 and A380s. There might be some things said for deals with the plane makers, but the long term operating headaches might negate any short term monetary advantages.
But at some point, the economics doesn’t make sense, Air Asia X is one of the more egregious offenders wanting to put that many airplanes basically in the SE Asia region, but they are far from the only ones. There is also Emirates with their 100+ backlog of A380s and 100+ backlog of 777X. Both numbers are mindbogglingly absurd, and essentially the underpinnings of both the Airbus and Boeing programs for A380 and 777X respectively. These rather unsustainable numbers are going to eventually impact the two majors.
Speaking of them, both Airbus and Boeing now have something like 10 to 12K of backlog of aircraft deliveries between them. Then there is their projection for future business over the next two to three decades usually which aggregates probably to another 15K plus of airplanes or thereabouts. At some point, something will have to give. Nobody can sustain such rates of replacement for capital equipment, it seems like someone is thinking these planes are replaceable like smartphones, and that’s just insane.
So that calculates at maybe 300bn a year over the next two decades, including backlog, for Boeing and Airbus, the two main commercial aircraft suppliers globally. That is the hardware for a majority portion of global air travel I would think – a lot of people.
US military spending is somewhere north of 500bn – these are all rough figures, in fact I try to exagerate against air travel.
When you look at what mankind is capable of,and the above figures are just an example comparison of human enterprise, then it is not obvious that expanding/replacing a fleet of aircraft to the suggested level is not possible, if that is decided by whatever means, as worthwhile achieving.
The basic ingredients are present, labour, technology, materials, customers as well – there is a surplus of resources, apart fuel maybe, not that this direction will necessarily equate if it is not deemed worth the expense in comparitive terms to whatever else people might prefer to dedicate their resources to, even if that were just a preference to sit at home watching tv, with a new car in the driveway.
It’s worse than that.
Many airlines have been ordering aircraft with what I can only call “complete abandon” without even pausing to consider they are gutting the value of the aircraft they are presently flying. Just to give an example deliveries of members of the Airbus A320neo family are predicted to be over twice the projected retirements of Airbus A320ceo for the next decade. It means a glut of epic proportions in the used market.
Profit-driven companies know this and have been preparing for it. To give an example Ryanair has been quietly selling off their older Boeing 737-800’s over the past three years and replacing them with dry leases and has been preparing investors for “many years” of flying a mixed fleet of 737-800 and 737 MAX-200. IndiGo, which in many ways is very similar to the Irish behemoth, has been doing the same thing, albeit their fleet is wholly Airbus-based.
The values of used aircraft is going down, and given the overcapacity in cargo we have right now (no “crash”: this is due to too many aircraft competing for too little cargo) conversions will only help to a point. This is going to affect financials as well because the moment your $50 million Boeing is suddengly worth $45 or even 40 million your collaterals will get a whole lot worse and creditors will start demanding more/better collaterals, higher interests or both.
It’s often said that selling tickets at cost or even at loss is better than keeping aircraft on the ground, but the last couple of years have shown that is no longer the case. Air Berlin, SkyWork, Primera Air… the casualty list is getting long, and that’s without counting airlines such as Laudamotion and Wow which were bought out while bleeding red ink all over the place. And this is happening at the bottom (or peak) of financial repression. Credit is already tightening: the Reserve Bank of India has already started to hike interest rates and while the ECB remains firmly in NIRP-land real-world interest rates have already started to tick forward.
This is going to get ugly, but not in a Lehman way. Think about the frog being slowly boiled alive and you’re close to what to expect.
You know, the real odd thing is that right now, it is the legacies that seem to be most grounded in terms of their purchases. I look at some of the US airlines, and most of them are being fairly prudent, and most of those actually seem to have reasonable balance sheets built on ancillary revenue.
What I find strange is a whole bunch of airlines, mostly from Asia that is acquiring a huge number of aircraft, mostly these are airlines that are brand spanking new, or ones I haven’t heard of before. Companies like Vietjets and so forth that just orders 100 airplanes at a go. It really makes me wonder what happened to the secondary markets for older 737s and A320s, as well as older twin isles.
Somehow this focus on fuel efficiency is driving some crazy decisions. I do have to also handed to Boeing marketing on the fact that they made all these airlines buy into the point to point model vs the spoke and hub. That shift I think was largely built on the backs of fuel efficiency, and the idea that more people will use those routes. Now back in the end of 2000s, it might have made sense, oil prices were surging, and people were all thinking about how green they need to be, then, there was the assumption that the great middle class from India and China will keep the airliners business booming, but the capital outlays were absolutely insane.
Now there are already signs that these point to point routes aren’t that great. If I look at for example, San Jose airport, there was a surge of new routes since the introduction of the 787. But now, the tide is receding, both Lufthansa and Air China are leaving San Jose, and I wouldn’t be surprised if Hainan left as well at some point. A lot of these routes simply doesn’t make sense. Why does there need to be SJC to PEK, and SJC to PVG when there are rational choices just 40 miles down the road at SFO. Granted, this is a bit of an extreme case.
You can see that if there were any external shock, things will go bad for both Boeing and Airbus. Literally, all it takes is for Emirates to go under or get crippled for whatever reason (war in the ME), and the A380 will shut down almost immediately, and the 777X suddenly would’ve lost its business case. But the question I’m wondering about is who is going to be the suckers left holding the bag. I doubt if it’ll be the duopoly, I’m starting to wonder how much of this will be laid at the doorsteps of the ExIm bank where a lot of these loans were originally guaranteed.
I would suggest to you that the only way many of these companies can “afford” to buy new aircraft in such large numbers is solely due to leasing. This would explain why these companies can survive despite the increased competition and lowering prices. And, yet, in not worrying about losses in the capital costs of their aircraft. It would be interesting to know what type of lease contracts they use.
Also, it should not be forgotten that these same airlines buy their fuel in advance and in bulk, so they are not affected by fuel price changes, and we can be assured that they get good discounts.
Who knows what arrangements they make for landing fees if they “lease” their parking lots and terminal?
I was thinking about doing a piece about leasing in the future, but I have some doubts about it, so for the moment is on hold.
Suffice to say the percentage of leased airliners worldwide has been stable for a few years at around 45% and that the big ten lessors worldwide are just as guilty of placing maxi orders as everybody else: AerCap has presently 260 Airbus A320neo on order and SMBC 110.
Considering right now the SMBC fleet is on average just 5.5 years old (one of the youngest worldwide) it means, you guessed it, a glut of used airlines in excellent conditions coming unto the market just when everybody, from Air Asia to Wizz, has big plans to replace similarly used aircraft with brand new ones.
Another thing: Norwegian Air Shuttle has been hedging fuel prices since 2013. Imagine what their financials would be had they not taken this step. In short fuel prices are important, but less so than avoiding a Netflix-based expansion model or having a clear path to sustainability.
Finally… remember that just because Ryanair does it it doesn’t mean your company can.
Ryanair has long been the undisputed master of grabbing airport management groups by the shirt collar and shaking them for pennies. They demand low landing and handling fees and a host of other privileges. Big airports packed with traffic such as Heathrow and Charles de Gaulle can afford to ignore such behavior, but Europe is packed full of smaller airports, often built by local governments with a big helping of EU funds, which are desperate for traffic to justify their existence. If Ryanair feels you are desperate enough they may even brazenly demand for cash incentives and drop you the moment you cannot afford to pay them anymore.
But all the smaller upstart airlines, often based in Eastern Europe, have limited leverage with airports. They have to pay fees in full or content themselves with small discounts and cut costs elsewhere.
There are all stories around about these smaller upstart airlines running into financial troubles which usually make the news only if it results in passengers getting stranded and a slow day at the local newspaper. For example the local newspaper ran a story about an Ernest Airways Airbus being stuck in an airport in Spain over unpaid fuel bills. It was only covered as a “human interest story” because one of the newspaper journalists was onboard.
As it always happens even during boom times, behind every success story there are dozens of companies just getting by which become history the moment they stumble.
On an aside rising interest rates may “clean out the cobwebs” so to speak.
->So if profit is not the endgame, what is?
The cynic could suppose the purpose of some of these companies is to provide highly-compensated employment for the execs for a couple of years, and not to establish or maintain viable businesses.
It seems to be an increasingly popular business model across the board. I blame Milton Friedman and the ‘shareholder value’ mythology of the Chicago School, which lends itself too easily to gamesmanship in the front office, ultimately to the detriment of all other stakeholders.
I take these low cost carriers all the time in Europe- Ryanair, Vueling, EasyJet.
I recently flew Ryanair from Beauvais airport just outside Paris, to Milan. The flight was packed and they didn’t bother tidying up the cabin from the previous flight.
Then I took an Aegean air flight from Paris to Istanbul (Istanbul is a gorgeous city BTW,- i walked across the bridge connecting Europe and Asia) and another time we flew Aegean from Paris to Yerevan, Armenia with a stopover in Athens.
These flights are very cheap (ie €100 one way from Amsterdam to Rome). It was cheaper to fly Vueling than to take the train.
Italian and Spanish passengers always clap when the plane lands.
They are thankful that they managed to land in one piece?
Ryanair and Vueling have long been known for what The Economist charitably called “cavalier treatment of passengers”. Let’s just say I think the overnight spare parts we order from Germany and Japan are probably traveling more comfortably and are treated better than the average Ryanair passenger.
As an aside we are all following the rapid expansion of Turkish LCC’s with a mixture of amazement and disbelief. Leaving aside those airlines such as SunExpress which were specifically created to incentivate the Turkish tourism industry, it will be interesting to see how they cope with this deadly cocktail: their entry into a mature, cutthroat market (Europe), a ruthless competitor well known to slash prices to drive other airlines off destinations (Ryanair), all new fleets (usually Boeing 737-800’s, $100 million apiece), rising interest rates and massive debt loads in currencies Mr Erdogan cannot control.
Finally… passengers clapping… as embarrassing as it’s depressingly common.
Turkey just inaugurated their new mega-airport. They will be in direct competition with the likes of Dubai for HUB status gateway to Asia/Europe.
That new airport is, in many ways, yet another part of the airline insanity I often speak about.
That structure was generousy financed by investors from Qatar, who are already heavily invested in Qatar Airways and the Doha-Hamad airport, which is already aggressively pitched as a competitor to Dubai. Same as Abu Dhabi, which is basically only used by Etihad, and Manama, which is undergoing yet another round of expansion.
Just how many “Gateways to Asia” do we need, especially considering these days direct flights between Zurich, Frankfurt, Milan and Asian megalopoleis such Bombay, Shanghai and Singapore are neither rare nor expensive?
Plus Airbus has finally caved in to demands from Singapore Airlines and developed an Ultra Long Range (ULR) version of the Airbus A350-900… “up to 19 hours of flight time”. A complete nightmare regardless of class, but this means the end of the “hub and spoke” model Tim Clark had attempted pushing on Airbus.
Recipe (Erdogan that is) was so fortunate to have the idiot Saudis do their thing so as to distract from the disaster that is the Turkish economy. I wonder how much debt they accumulated with that airport.
At least Mexico had the sense to try to kill their project. The only question now is whether AMLO will survive this effort. These projects are almost invariably disasters set up specifically to benefit whichever companies get the contracts, and designed to screw the general public.
I have found Ryanair to be largely unpleasant. Easyjet, its main competitor in Europe, is far superior, in my experience.
Any views on the Gulf carriers Emirates and Etihad? Without having looked into them with any rigour, my impression is they have expanded rapidly based on government sugar-daddy money as nation-building initiatives, rather than commercial success of the airline operations. With UAE and Dubai apparently now cash constrained, Etihad is cutting routes and has closed its Heathrow executive lounge. Rumour is that Emirates and Etihad will move towards merger.
If you read pilot forums, Emirates has deteriorated in recent years as an employer, is losing top-caliber expat pilots and having trouble replacing them. The same with Cathay Pacific in HK. Not a good indicator for safety.
Etihad just partnered with Saudi airlines (bleh!) …..avoid. Stick to Emirates, they have a future (and at least they serve alcohol (and champagne) on board.
When I first wrote this piece I included a quotation by Tim Clark (the President of Emirates, formerly of Gulf Air) where he pitched an “inevitable” single class Airbus A380 carrying 760 passengers and hinted of a stretched variant carrying a mind boggling 870.
I then edited it out because the piece was already way too long but it would make a fine addition to any piece regarding the general insanity surrounding Emirates and other (but not all) Gulf carriers.
Let’s just say that my brief dealings with Arab countries I learned several valuable lessons, one of which is the boundary between “State-owned”, “Private corporation” and “Owned by the members of the ruling family/clan” is often a boundary in name only. It’s a completely different world even from Iran, which is the other side of the Persian Gulf and has some very peculiar business idiosyncrasies (relax: I am not a US citizen nor do I operate any US-based business).
You cannot really consider Emirates, Etihad, Saudia etc as mere corporations such as American Airlines or Ryanair, or even “ordinary” State-owned companies such as Air China. They are part of very intricate political/economic network which extends far beyond the boundaries of the Middle East and as part of these networks they were not organized from scratch to be profitable.
Times change. We have entered the theater of “make work” manufacturing & huge ghost fleets of jet aircraft – perhaps never to be flown after their initial delivery to the state subsidized buyers. Since building the Great Wall the Chinese are proving once again that this centrally directed business model can work. Transparent corporate books & uncooked corporate profitability are a thing of the past for select elite corporations. s-
A bit of advice: never fly a domestic, low-cost carrier in Indonesia. Pilots in Indonesia have to enroll in pay-to-fly programs (p2f) at these low cost airlines (Lion Air) AFTER they earn a pilot’s certification. These pilots often earn certification as a status symbol from corrupted schools and institutions with iffy training standards.
Similar advice…when in Africa, stick to the major carriers — only they have decent maintenance programs and properly trained pilots. Low-cost/smaller startups buy decades old airplanes from other carriers and run them into the ground.
Given the recent news that the likely cause of the Lionair crash was ‘either (or both) the angle of attack indicator and the airspeed indicator’ causing ‘porpoising’, I think that Michael Crichton’s 1996 novel ‘Airframe’, where the plot described a fatal crash of an Asian-crewed airliner for almost the same reason was amazingly prophetic. Well worth a read!
A Jamaican jet just crashed on takeoff in Guyana enroute to Toronto . Same model!!!
When does Elon start a plane company?
Well at least when all the debt/equity holders get burned, the world will be left with a bunch of modern comfortable fuel efficient jets. These machines are much cheaper to operate then their predecessors, and will serve the flying public for many years to come.
Compare that with the bubbles in tech or housing. Those will simply leave a legacy of fraud or a dilapidated housing stock that nobody wanted to maintain because they were making so much money doing nothing.
In this brave new world of suppressed interest rates, capital cost is actually rather irrelevant to the general public (who have no capital to allocate/lose anyway). The bigger issue is whether on going operating costs are improved. White elephants are a cashflow issue (unless you put up the capital of course).
Before getting there we have to pass through a painful phase were used jetliner prices will get crushed.
As I outlined above this will lead to lower-valued collaterals at a time when interest rates are raising worldwide and many airlines are already both cashflow negative and DID (deep in debt).
Airline bankruptcies have already started and they will get worse as companies such AirAsia get their hands on literally hundreds of new airliners: beside the 100 Airbus A330neo for the long-range “X” subsidiary, AirAsia has already over 300 Airbus A320neo on order. Even if they replace every single A320ceo they presently operate their fleet will be more than doubled. How do you say “overcapacity” in Malay?
This cannot and will not end well, and as usual taxpayers will be on the hook for billions because if there’s one thing these expansion-obsessed types are very good at is taking to the streets and beating on their pans when they don’t get it their way. See the infamous Wall Street crybabies.
The problem is of course how to save an air company when it reaches that size: Italy has been struggling for years now to do something with Alitalia, and all she managed to do was barely keeping the company afloat after auctioning off every hard asset you can think of, from the lucrative luggage handling services to the aircraft themselves. There really isn’t much left but the name, the routes and a lot of well paid “company doctors”.
Economies like the Indonesian and Malaysian ones are considerably smaller than the Italian one, and the size of these LCC’s is considerably larger than Alitalia’s. Given my love of the Malay and Indonesian peoples I pity them for what the future has in store.
Crandall lost to Southwest Airlines and that was with having the US government on his side.
French Authorities Seize Ryanair Plane On Runway Over Unpaid Bills, 147 Passengers Kicked Off
https://www.zerohedge.com/news/2018-11-09/french-authorities-seize-ryanair-plane-runway-over-unpaid-bills-147-passengers
Sneaky Pete,
The ZH headline is BS. You should never believe ZH headlines. You need to read the whole article, which starts out like this:
“The dispute arose after French subsidies paid to Ryanair between 2008 and 2009 in exchange for providing flights between Angouleme and London were deemed illegal. The airline had paid approximately half of the subsidies, leaving an outstanding balance.”
This was an EU dispute over state subsidies Ryan Air had received, not “Unpaid Bills.”
ZH grabbed this article from the Daily News, which had this more accurate headline: “Ryanair has a plane seized by French authorities to force the airline to repay illegal public aid.”
Everyone, please, do me and all of us a HUGE favor and don’t post links based only on the headline.
Agree about ZH headlines lately- and the comments section is out of control. Been a member for 5 years and it’s changed a lot- not for the good.
When ZH first started it was real intelligence on the economy and more importantly finance.
All of the heavy hitters are long gone.
Cheap credit is comming to an end even in Europe so this business will probably…. crash next year or in 2020.
Cheap credit is basically already over in Europe: despite the monetary artillery still being deployed in full force, 2018 has seen interest rates start to tick upward. Not much in absolute terms, but in percentage double digit increases are the norm. If you shop around and/or threaten your bank with taking your business elsewhere you may even get something resembling a yield. Things are changing, whether the easy money crybabies like it or not.
And as I’ve said numerous times, airline bankruptcies and fire sales have already started in spite of these easy money conditions.
When you see airlines run by people with only moderate experience and backed by pension funds with little or no airline experience order 20 Boeing 737 MAX and immediately start to take on Ryanair with a bunch of leased aircraft, you already know how it’s going to end. It’s only a matter of how long the pension fund managers want to stay up at night wondering if North Korea has no extradiction treaty with Germany or Sweden.
My first flight using Alaska Airlines, probably 20 years ago, was on a plane where every seat was huge. It was a coach ticket. Found out it was the Seahawks team plane which Alaska used for regular flights during off season. Only happened once, but a nice way to fly.
Which leads me to thinking, if California can vote and pass laws stating that chickens must have a certain amount of room, why can’t a regulation support a decent amount of space for regular passengers.
Appears that the chickens in California have a better lobby……..
Buried between all the usual pre-electoral humbug, in October Senate ordered the FAA to set standards for the size of airline seats. The standards, called “Seat Egress in Air Travel” (lazy acronym), should be ready by Q4 2019.
Expect the airline lobby to get in full swing, so it may be a good time to check what your Senator voted for and remind him/her to keep up the good work. ;-)
There is a saying that collectively, the airline industry has not turned a profit since the Wright brothers first flew from Kitty Hawk. The history of air travel is littered with losses, bailouts and bankruptcies. Every generation of airline investor has had their heads handed to them. Looks like the airlines plan to keep operating on the same business model.
You could say almost the same from Construction since at least two centuries ago (they hugely depend on government contracts), the Coffee industry since it started to be mass produced, fruit farmers and so on…
If you average everything it turns no one makes profit ever.
So don’t do that because is a lie.
My view; nobody can compete with Qatar, Emirates and Etiah at the moment because they buy their airplanes with cash; no bank loans or leases like the European airlines. They are funded by their government and have access to very cheap aviation fuel. They are ideally geographically located being midroute between Asia and Europe.
I understand that the Airbus A380 is becoming redundant and that Airbus cannot shift the A380 at the end of the leases as airlines are opting for A350s.
I have also notice that there are a lot of empty seats (last week the leg from Bangkok to Doha was only 10% full and Doha to London 50% full).
There is obviously oversupply and the airlines using bank finance (western airlines) will be under financial stress first.
With regard to the airline manufacturers; I would say Boeing and Airbus will suffer severely in the coming years as China have recently unveiled their own manufactured airplane; the C919 that appears to be a copy of the Airbus. Airbus having a factory in China manufacturing airplanes that was expanding and Airbus using Brexit as an excuse to talk about closing the wing factory in the UK.
I also notice that over the last 10 years travelling on internal flights in Thailand, 90% of the passengers used to be foreign and 10% local Thais and Chinese; now it is the other way.
Airline fares flying from the UK have gone up a lot despite the price of oil falling. When looking at the breakdown of the airticket appears to be due to airport security fees due to the muslim terrorism threats.
If you think the Gulf airlines have no problems because they have “no loans”, well… Etihad had an operating loss of over $1.8 billion in 2016 and over $1.5 billion in 2017. And that’s with a (reported) growing number of passengers and after firing 2,000 employees. Let’s see how long before accounting laws in Abu Dhabi are amended to allow them to eliminate losses and turn a profit, China style. ;-)
Thank you MC01 for your contribution. I diligently read and enjoyed your shipping industry series.
And thanks to you!
Regarding IAG’s purchase of a stake in NAX, I seem to recall reading recently that they sold the stake after deciding a takeover wasn’t in the cards. Don’t remember any reason being given.