3 Reasons why the Number of Failing Airlines is Sky High

“Dear Guest, Your Jet Airways flight mentioned below has been cancelled. We regret the inconvenience caused to you and apologise for the same.”

It is just one week before our long-awaited trip to Sri Lanka, and in the click of a mouse and a shortly-worded email, our travel plans hang precariously in the balance. Having only travelled with Jet Airways at the tail end of 2018, I saw an attractive price tag for a route that premium full-service carriers exploit. Not only had I failed to undertake any safety checks regarding this offer but, but I’d also chosen to pay with a debit card rather than a credit card, excluding me from Section 75 of the Consumer Credit Act (UK).

No fluff: The short and sweet email that passengers received from Jet Airways

Any chance of a refund depended upon my impassioned calls, emails and tweets to Jet Airways customer service

The number of people flying around the world is increasing year on year, and so is the cash flow for airline providers. However, despite this travel boom, the frequency in which airlines crash and burn into financial ruin is soaring and leaving passengers stranded, frustrated, and out of pocket. WOW Air, Flybmi, Air Berlin and Jet Airways are just a few examples of airlines that couldn’t fly the distance. Even though more people are flying today than ever before and seats are getting cheaper, the problems which plague airlines haven’t disappeared.

Though each failure has specific unique circumstances, there appear to be commonalities each time an airline succumbs to its demise. Here are three of the major reasons as to why airlines around the world are faltering.

Poor Cash Flow Management

While airlines do generate a lot of cash, outgoings to taxes, crude oil, and poor investments tip the scale in the wrong direction. A series of unwise investments was the major reason why Jet Airways ultimately succumbed to its demise. It all started in 2006 when the airline bought Air Sahara for $500 million in cash. Many experts advised the CEO of the airline, not to go ahead with the deal as the buyout price was too high. However, this among many other decisions were made with little consideration of long-term impact or long term turbulence. Just like Jet Airways, WOW Air was also relatively flushed with cash in its initial years of operations. Their CEO Skuli Mogensen, pointed to the order of expensive additions to their fleet when they could have continued to build up the cash reserve for unforeseen environments. Aeroplanes are expensive assets to maintain, which can prove challenging during off-peak periods.

Fluctuating Oil Prices

The airline industry is highly sensitive to global crude price changes; with India being the major importer of crude oil. Even the slightest fluctuation can result in a jumbo-sized additional spend on oil. Jet Airways was largely affected by this fluctuation of oil prices as well as a drop in the value of the Rupee against major currencies, which put pressure on the local aviation industry. Because of this, no Indian carrier was spared, with Jet Airways suffering the most.

Even FlyBMI that ceased their operations in February 2019 blamed the collapse of their airline on fuel prices and the uncertainty created by Brexit. For smaller airlines, when the price of oil increases, there is little space for them to increase their oil price hedging, to cap an oil price at a certain level or for a period of time.

Struggle for Market Share

Having an insufficient market share ensures that not enough money is flowing into the business and can happen for a variety of reasons. As for FlyBMI, they were simply unable to compete in a saturated market. In Europe, for example, smaller low-cost carriers cannot dominate airports unlike larger counterparts, such as EasyJet who can drive down ticket prices to suit sales. While the demand overall for air travel increases, much of that falls on routes between busy business hubs such as Amsterdam Schiphol to London Heathrow. Many routes have a flat demand, such as Aberdeen, GB, to Reus, ES. Therefore, it isn’t logical for smaller carriers to try and compete with another airline on a route that shows no opportunity for growth.

It’s not just small, low-cost carriers that suffer. Larger full-service legacy airlines struggle to maintain a strong market share due to the oversaturation of low-cost carriers operating in the industry. Being a highly competitive industry, Jet Airways underestimated the low-cost airline business model. Indigo, Go Air and Spice Jet offered tickets at lower prices to meet the demands of a price-sensitive market. India’s aviation industry already operates on tight profit margins due to excessive taxation, more so than their international counterparts. When you couple this with competitive low fares, it’s no wonder that 2018 saw these Indian carriers each record net losses.

Final Thoughts

Aviation is an industry of profound change, triggered by consumer demand, airline competition, fuel prices and investment gambles. In the repeated downfall of airline after airline, the high level of competition in the aviation industry does not forgive mistakes. As consumers, we need to look past the attractive bells and whistles of low fares to understand more about the airlines we’re choosing to book with. Luckily, my persistent communication with the Jet Airways customer service team paid off, and I, fortunately, did get a full refund. However, many are not so fortunate.

As to date, Jet Airways is still “temporarily grounded”, despite having a debt of $1.6 billion and a lack of bids ready to get it back in the air. It seems too little too late for a legacy line that certainly won’t be the last casualty in the volatile aviation industry.

– Sarah Maclean

Featured Image: Pixabay

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