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Q. What Factors Are Making Airlines Go Bust?  
User currently offlineBAfan From United Kingdom, joined May 2008, 189 posts, RR: 0
Posted (6 years 2 months 2 days 5 hours ago) and read 1967 times:

Dear All,

I need some help for a university project, the question that I have to answer is:

What are the factors involved in airlines going bust?

I look forward to hearing peoples responses.

Many thanks,

BAfan

14 replies: All unread, jump to last
 
User currently onlineStitch From United States of America, joined Jul 2005, 31420 posts, RR: 85
Reply 1, posted (6 years 2 months 2 days 4 hours ago) and read 1957 times:
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Same reason most any business goes busts - costs exceed revenues beyond the point savings and access to credit can cover the difference.

In the costs department, fuel prices are higher, equipment prices are higher, labor costs are higher, service costs (catering, maintenance, storage, landing fees, gate fees, taxes. etc.) are all higher.

In the revenues department, less people are flying and they're more price-sensitive then before. So airlines are flying less people and generating less revenue from each of them.

The equation has changed a bit recently, as fuel prices drop and capacity reductions squeeze out the most price-conscious passengers, resulting in fare increases that are helping raise revenues while also lowering labor and service costs.


User currently offlineAA737-823 From United States of America, joined Mar 2000, 5947 posts, RR: 11
Reply 2, posted (6 years 2 months 2 days 4 hours ago) and read 1949 times:

I have a lunch appointment, so I'll have to make this unfairly short. But here's my take on it.

1. The same old things as forever:
a) Fuel prices, which are higher (not at the moment, but in the last six months anyway) than ever before, making even efficient planes like the 738 and A320 harder and harder to fly, and
b) Labor costs, which keep going down, yet the unions won't stand for it forever, especially as we face inflation and tough times.

2. One new facet: Over competition. Immediately after deregulation, there wasn't that much ROUTE competition. But in the now THIRTY years since, airlines have all grown to serve every single major city in the nation. It's oversaturation. I can fly on ALL of the major carriers (and most of the low-fare carriers, like Frontier, AirTran, Southwest, and probably soon Virgin A and JetBlue) from Orlando to Seattle, or from New York to the LA Basin. EVERY airline is offering the SAME PRODUCT.

Kind of like in the decades past of US automobile production- the population likes choices, but Packard, Chord, Deusenberg, AMC, and countless others couldn't stay alive because there were too many companies offering four wheels with V-8s in them, more or less.
That's not the best comparison I've ever come up with, but I have to go now, so it'll have to do!

P.S.- please don't cite me as an industry expert in your paper!


User currently offlineCubsrule From United States of America, joined May 2004, 23302 posts, RR: 20
Reply 3, posted (6 years 2 months 2 days 3 hours ago) and read 1889 times:

I think another factor is that consumers are, for whatever reason, extremely price-sensitive. Airlines with higher cost structures have difficulty competing when they cannot garner a sufficient revenue premium. I don't know what causes this in the airline industry more so than in other industries; perhaps transparency (from Orbitz and the like) is part of the issue.


I can't decide whether I miss the tulip or the bowling shoe more
User currently offlineDLPMMM From United States of America, joined Apr 2005, 3602 posts, RR: 10
Reply 4, posted (6 years 2 months 2 days 3 hours ago) and read 1869 times:



Quoting AA737-823 (Reply 2):
2. One new facet: Over competition. Immediately after deregulation, there wasn't that much ROUTE competition. But in the now THIRTY years since, airlines have all grown to serve every single major city in the nation. It's oversaturation. I can fly on ALL of the major carriers (and most of the low-fare carriers, like Frontier, AirTran, Southwest, and probably soon Virgin A and JetBlue) from Orlando to Seattle, or from New York to the LA Basin. EVERY airline is offering the SAME PRODUCT.

 checkmark 

Quoting Cubsrule (Reply 3):
I think another factor is that consumers are, for whatever reason, extremely price-sensitive. Airlines with higher cost structures have difficulty competing when they cannot garner a sufficient revenue premium. I don't know what causes this in the airline industry more so than in other industries; perhaps transparency (from Orbitz and the like) is part of the issue.

 checkmark 

Economics plain and simple.

The industry has high fixed costs (planes, etc), relatively low barriers to entry (no significant technology barriers, just money, and a newer airline will have lower costs than an established airline for a period due to lower seniority wages and lower aircraft maintainence cost on new planes), the product is essentially a perishable commodity with little differentiation, the customer is highly price sensitive and elastic, the producers are highly inelastic in their supply, and the worst part....

Huge numbers of people think it is sexy to own, run, invest in, work at, or otherwise be involved in an airline. This makes for too many investors that don't look at the return and too many employees that will work cheap to be "in the biz". This makes for a continual of oversupply of product

Airlines have always been a crap longterm investment, excepting Southwest. Even WN has finally started to show some chinks in their armor now as well.


User currently offlineOlympic472 From United States of America, joined Jun 2008, 476 posts, RR: 0
Reply 5, posted (6 years 2 months 2 days 2 hours ago) and read 1853 times:

They do not have sound business plans. Many airlines should not have been started at all. Going after the legacies by offering lower fares is not a sure-win formula. Just research Independence Air.

On the other hand, the financial types consider their business plans as sound because these financial types do not care if the airline succeed after a certain time frame. They measure the success of the airline by their returns and how quickly they get there.



Civil Aviation has a "Need for Speed"!
User currently offlineTango-Bravo From United States of America, joined Jun 2001, 3806 posts, RR: 29
Reply 6, posted (6 years 2 months 2 days 2 hours ago) and read 1821 times:



Quoting AA737-823 (Reply 2):
One new facet: Over competition. Immediately after deregulation,

Not just over competiton... the ruinous competition that regulation was established in 1938 to prevent. Assumptions such as "things have changed" and "the industry has matured" to the point where the airline industry was ready to be deregulated has proven to be the wishful thinking that any thoughtful, realistic person would have recognized it to be back when talk of deregulation was all the rave.

The answer to the question "What Factors Are Making Airlines Go Bust?" is not rocket science at all. The CAA (later CAB) was established 70 years ago to prevent ruinous competition among airlines; the end of CAB and airline route and fare regulation was the beginning of the ruinous competition of today that has resulted in today's sorry state of the once proud U.S. airline industry and why most airlines operate mostly in the red most of the time. The enactment of deregulation was, at the same time, the beginning of the end of a stable, viable airline industry that had served the U.S. well for some 40 years prior to 1978.

Also, the U.S. airline industry is not in any way helped by double-mindedness which, on the one hand, sees airlines as a quasi public utility essential to the national interest while, at the same time, leaving the various airlines (components) that comprise the essential service to their own devices, resulting in ruinous competitive practices, which in turn puts pressure on government to bail out the major players who are ruined by the same laissez-faire, no-holds-barred, anything goes style of deregulation promoted by the same government standing by to bail out ruined airlines, thus further distorting the competitive landscape and even leading to the ruin of competitors who might otherwise have survived and even been profitable.


User currently offlineVV701 From United Kingdom, joined Aug 2005, 7737 posts, RR: 17
Reply 7, posted (6 years 2 months 2 days 1 hour ago) and read 1802 times:

Two important factors at present could well be poor management and, in the current credit crunch, the difficulty in raising new capital and the difficulty of covering operating losses through borrowing.

User currently offlineTylerDurden From United States of America, joined May 2008, 852 posts, RR: 0
Reply 8, posted (6 years 2 months 2 days 1 hour ago) and read 1790 times:



Quoting Tango-Bravo (Reply 6):
the ruinous competition



Quoting Tango-Bravo (Reply 6):
70 years ago to prevent ruinous competition among airlines



Quoting Tango-Bravo (Reply 6):
airline route and fare regulation was the beginning of the ruinous competition of today



Quoting Tango-Bravo (Reply 6):
resulting in ruinous competitive practices,



Quoting Tango-Bravo (Reply 6):
anything goes style of deregulation promoted by the same government standing by to bail out ruined airlines



Quoting Tango-Bravo (Reply 6):
distorting the competitive landscape and even leading to the ruin of competitors who might otherwise have survived and even been profitable.

That's an incredibly myopic opinion. Competition has allowed well managed airlines to expand at rates not possible under regulation, while lowering consumer costs (in real dollar comparisons) dramatically.
Business is about survivor of the fittest. Poorly managed airlines, for whatever reason, have failed that test.
Your view is nothing more than sour grapes.


User currently offlineIkramerica From United States of America, joined May 2005, 21583 posts, RR: 59
Reply 9, posted (6 years 2 months 2 days 1 hour ago) and read 1787 times:



Quoting Olympic472 (Reply 5):
They do not have sound business plans. Many airlines should not have been started at all.

This is very true. Airlines go bust around the world every year, during good and bad times. Bad times just make it happen faster with some carriers, good times just keep a failing model afloat longer than it might otherwise before it sinks. But bad business models will fail in the long run.



Of all the things to worry about... the Wookie has no pants.
User currently offlineVV701 From United Kingdom, joined Aug 2005, 7737 posts, RR: 17
Reply 10, posted (6 years 2 months 2 days ago) and read 1769 times:



Quoting DLPMMM (Reply 4):
relatively low barriers to entry

I think this is a real key issue. Look how many major international airlines there are in the world. Every country of any size has at least one. Larger countries have . . . Well, dozens.

Now look at any other international industry.

Take credit and charge cards. Over most of the world there's Amex, Diners Club, Mastercard and Visa.

Look at photographic film. There's Eastman Kodak and Fuji together with a small number of minor or niche players such as Polaroid, 3M and Ilford.

Even in food retailing there's Carrefour, K Mart and Tesco all with huge market shares in their home markets and in many other countries. This type of consolidation from the days of the market stall and then the small corner shop comes from the advantages of purchasing power. But this does not count for nearly so much in commercial aviation. Although the very large airlines can get a very good deal because of their size from Airbus or Boeing, the start up airline can get a very good deal in the used aircraft market for the one or two aircraft it needs.

In the airline industry we view things very differently. We even have serious discusions about the lack of competition on the LHR-JFK route when, even in pre Open Skies days, the route was served by six different airlines. And perhaps half the passengers flying LHR-JFK either started or finished their journey at another airport and could have selected an entirely different route operated by entirely different airlines.


User currently offlineDLPMMM From United States of America, joined Apr 2005, 3602 posts, RR: 10
Reply 11, posted (6 years 2 months 2 days ago) and read 1759 times:



Quoting VV701 (Reply 7):
Two important factors at present could well be poor management and, in the current credit crunch, the difficulty in raising new capital and the difficulty of covering operating losses through borrowing.

The capital credit crunch is clearly not the cause, since airlines have been biting the dust all over the world since well before the credit poop hit the fan. The expected downturn in traffic will be speed things a bit, but the problem is more deep rooted than that.

Blaming "poor management"? What is legacy management supposed to do when faced with a newly deregulated environment where LCCs cherry pick the most profitable point to point routes and undermine the feed of their hubs. With the arrival of the LCCs, there is just not enought domestic market to sustain 6 legacy carriers hub systems. The government was lothe to allow consolidation until after all the legacies in the USA (but AA) were forced into Chapter 11 (or worse). In addition, the legacies were saddled with 20th century defined benefit plan costs and union benefits and work rules, while the LCCs had defined contribution plans with 21st century work rules and benefit plans.

Europe is going through some of the same but is several years behind in deregulation, so some of their problems are yet to come. Even so, examples abound in Europe as well, AZ, SN, SR, Silverjet...crap, how many in Europe have folded in the last year? A bunch.

If it was not for the slot restrictions at most major Europeam airports, the Euro legacies would be hurting alot worse than they are now. Imagine Ryan Air at LHR flying hundreds of flights throuout Europe. What would that do to BA?


User currently offlineAviateur From United States of America, joined Apr 2004, 1360 posts, RR: 11
Reply 12, posted (6 years 2 months 2 days ago) and read 1754 times:

That's more or less easy: selling their product below cost.


PS



Patrick Smith is an airline pilot, air travel columnist and author
User currently offlineVV701 From United Kingdom, joined Aug 2005, 7737 posts, RR: 17
Reply 13, posted (6 years 2 months 1 day 23 hours ago) and read 1712 times:



Quoting DLPMMM (Reply 11):
Blaming "poor management"?

If you take two airlines of a similar business model and a similar size and one goes to the wall and the other does not then a prime cause may be poor management. To exclude poor management from a list of possible factors seems to lack all logic. To do so suggests either that no airline has ever been poorly managed or that no poorly managed airline has ever gone to the wall. It also clearly says that all bankrupt airlines have been well managed!

Quoting DLPMMM (Reply 11):
The capital credit crunch is clearly not the cause, since airlines have been biting the dust all over the world since well before the credit poop hit the fan.

Airlines have been biting the dust all over the world since well before deregulation just like they bit the dust before the credit crunch.

Airlines have also been biting the dust all over the world since well before the LCCs made their appearance just like they bit the dust before the credit crunch.

So I fail to see how you can suggest that deregulation and the adventv of LCCs can be a factor if the credit crunch cannot simply because some airlines went to the wall before the credit crunch. Your argument lacks any logic.

Quoting DLPMMM (Reply 11):
Imagine Ryan Air at LHR flying hundreds of flights throuout Europe.

It is very difficult to imagine this as it is at total odds with the FR business model. FR would never operate from LHR even if LHR was only half full. Why? Well:

FR could operate today from FRA but they do not. They choose instead to operate from what they call Frankfurt (Hahn).

FR could operate out of BRU, but they chose not to. Instead to operate from what they call Brussels (Carleroi).

FR could operate from OSL but they do not. Instead they chose to operate from what they call Oslo (Sandefjord).

FR could operate out of CDG but they do not. They chose to operate from what they call Paris (Beauvais).

In the case of FR the term "LCC" embraces the cost of using the airport. And the cost of the landing and other user charges at LHR as well as those at FRA, BRU . . . Well, using such airports is simply not part of their business model.


User currently offlineLightsaber From United States of America, joined Jan 2005, 13543 posts, RR: 100
Reply 14, posted (6 years 2 months 1 day 22 hours ago) and read 1668 times:
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I would have to add one of the major reasons airlines fail regularly is the inability to have smooth mergers and aquizitions. There is no set model for seniority. If the final merged list is done by pure 'date of hire,' no new airline with a better business model would ever buy an estabilished airline. There needs to be an estabilished process for the purchasing airline to make as part of their purchase a seniority merger.

But in general, its already been noted that the oil shock has caused more than a few airlines to burn through their cash reserves. Thus, weaker players are failing. This includes airlines that over-expanded. There is a time to expand... most airlines were growing as the economy slowed. While a recession is the time to grow market share... its not yet that time in the economy.

Quoting TylerDurden (Reply 8):
Competition has allowed well managed airlines to expand at rates not possible under regulation, while lowering consumer costs (in real dollar comparisons) dramatically.

 checkmark  Deregulation allowed airlines to compete with other forms of transportation. e.g., trains. Now, for some reason every hot shot billionaire wants to own an airline (e.g., IT, VS, and in the old days TWA). I see no reason any airline deserves my business. There should be open competition among all routes.

This issue is today's *over-competition.*

But there is another reason in the USA. After 9/11, all domestic airlines were bailed out. As noted above, there are too many airlines out there. If one or two had failed, the competitive landscape would be very different today. e.g., Sabina has left the playing field. In many ways, that helped the surviving European airlines.

Part of the problem with regulation is the inability to adapt to a changing world. e.g., India, China, and the Middle-East have become major markets. Yes, the worst over-expansion was in India. But that is self correcting now. In a truly regulated environment, we never would have had the growth in F and J product we saw during the bubble.

Another issue is the US, European, Indian, and other air traffic control issues. Its costing the airlines a fortune not going to GPS based navigation. Another issue is the lack of expansion from cities where more O&D traffic is possible. e.g., I've read studies that 25% of the potential air travel from San Diego doesn't happen due to SoCal's airport congestion.  Sad Its past due for an infrastructure upgrade!  hissyfit 


So there is no one cause. With a regulatory change on aircraft financing and crew seniority... We could have a healthy industry consolodation that would promote future expansion. But to go back to full regulation? Ugh... As a customer I dread that option. I remember how rarely people used to fly. Heck, I recall driving LA to Dallas every summer with me as a kid in the back of the family wagon. If we go back to the inefficient regulated industry... I'll have to make my Dallas trips to grandma less frequent and will probably drive half the time rather than flying. If someone who loves airlines would make that decision... Governments mess up more industries than they help.

Lightsaber



Societies that achieve a critical mass of ideas achieve self sustaining growth; others stagnate.
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