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Why So Many Airlines are Going Bankrupt

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00:00   |   Oct 08, 2019

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Why So Many Airlines are Going Bankrupt
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  • This video was made possible by Shopify—the platform behind Wendover and hundreds of thousands
  • of others’ online stores.
  • The last five years have the most the consistently profitable and financially successful years
  • ever for the world’s commercial airlines.
  • Including the 2019 forecast, they’ve earned more than $160 billion in combined profit
  • over this period.
  • With a world economy more robust and connected than ever, the aviation industry is flying
  • high… or at least most of it.
  • In these same five years, the world has seen some extremely high-profile airline collapses
  • and the frequency of these seems to only be picking up.
  • The trend truly began in 2017 when Monarch, a well-respected British leisure airline with
  • fifty years of history, went belly-up.
  • The very same month, Air Berlin, a massive airline with over 8,000 employees and 100
  • planes, also ceased operations.
  • 2018 then saw the end of Primera Air—an airline that generated buzz but seemingly
  • flew to close to the sun in its final days with its low-cost transatlantic flights—and
  • Cobalt Air—a small Cypriot carrier.
  • 2019, though, was the year of slaughter.
  • Wow Air, a huge player in the low-cost transatlantic market, stopped flying.
  • Aigle Azur, France’s second largest airline, stopped flying.
  • Xl Airways France, a long-existing transatlantic airline, stopped flying.
  • Adria Airways, a mid-sized Slovenian airline, stopped flying.
  • Then, after fifty years of history, Thomas Cook Airlines suddenly too stopped flying
  • in what entered the record books as the largest UK airline collapse ever.
  • Worth noting is that the aforementioned airlines are not cherry picked names.
  • It’s certainly not the definitive list of airline collapses in the past three years,
  • but they are most all the highest-profile ones, and with these, there are two interesting
  • patterns.
  • Firstly, every single one of these airlines is based in Europe.
  • Secondly, and perhaps more strangely, every single one of these airlines, with the exception
  • of Wow Air, stopped flying in either the month of September or October.
  • Neither the pattern in location or times of these collapses is a coincidence.
  • There are very good reasons behind these trends.
  • For the timing, you see, in general airlines’ most profitable season by far is summer since
  • that’s when there’s the most demand.
  • There are certainly exceptions to this rule.
  • For example, an airline flying between the Northern and Southern Hemisphere a substantial
  • amount, like Qantas, typically sees more more consistent month-to-month profits as it benefits
  • from the demand in both the northern and southern summer.
  • The seasonality of demand also varies significantly by region.
  • For example, here are a few years of overall month-to-month passenger figures in the US.
  • You can see that there’s a clear peak each August and a clear valley each February, with
  • smaller, secondary peaks each year for Thanksgiving and Christmas.
  • If you take a look at Europe’s month-to-month figures, though, you can see how relatively
  • stable the US’ traffic is.
  • Relying much more on leisure travel, which is highly seasonal, European airlines have
  • to cope with winter demand being almost half that of summer demand.
  • Airlines in the US, though, carry more business travelers, in proportion, who tend to book
  • more consistently throughout the year and therefore they don’t have as much excess
  • capacity in the winter.
  • There are even regions like Asia-Pacific that see nearly no seasonality in their demand,
  • but the main thing to know is that Europe has highly seasonal traffic which means the
  • timing of when its airlines make their money is highly seasonal.
  • For example, take a look at Ryanair’s quarterly gross profit graph.
  • In 2018, they made $901 million from January to March, $1.4 billion from April to June,
  • then an enormous $2.1 billion from July to September.
  • The fall was then definitively their weakest quarter with only $877 million made.
  • Essentially, they made 3/4 of their profits in half the year.
  • The problem airlines then have, though, is cashflow.
  • For the busy summer season, airlines will get paid for tickets in the months leading
  • up to those flights.
  • Therefore, most of the money for that season will get to them between March and August.
  • It’s therefore a season that can typically sustain even the financially weakest airlines.
  • Come September, though, bookings start to dry up and therefore so does cashflow.
  • With that, airlines will start to struggle to pay off their debts, let alone the costs
  • for fuel and other operating expenses.
  • Once an airline starts to fall behind on their debts, it tends to be a vicious cycle.
  • Quickly, they might have planes repossessed, which means they have to cancel flights, which
  • means they have to pay for hotels and penalties and for rebooking and pretty soon, the airline
  • won’t have enough money to operate and will be declared bankrupt.
  • In Europe, unlike the US, there is little opportunity for businesses to restructure
  • once bankrupt so, for the most part, that means they’re closed down immediately and
  • indefinitely.
  • As the aviation industry is so volatile and capital intense, these bankruptcies can happen
  • impressively fast.
  • In Thomas Cook’s case, there had been hints of its financial difficulties for months,
  • but at the end of August, it seemed the company would likely be saved by a buyout deal.
  • It only truly became clear that the airline was headed towards its end the very week of
  • its collapse but still, everything went on as normal from an operational standpoint.
  • On September 22nd, at 9:40 pm, the airline tweeted in response to a customer, saying,
  • “our flights and holiday operations are operating as normal.”
  • That was true… at the time.
  • All the flights were taking off, they were still selling tickets, everything was normal
  • from the public perspective.
  • Behind closed doors, though, things were not ok.
  • Five and a half hours later, in the early hours of the morning of September 23rd, the
  • company’s last tweet went out saying, “we are sorry to announce that Thomas Cook has
  • ceased trading with immediate effect.”
  • All around the world, at the very moment of their declaration of insolvency, flights were
  • quite literally boarding, crews onboard, planes fueled, ready to go.
  • With the company now gone, though, everything had to stop.
  • Those crews were not longer employed, that fuel wouldn’t be paid for, the planes were
  • no longer owned or leased by the airline, everything stopped.
  • Of course, once an airline collapses and its flights are cancelled, there is no longer
  • an airline to rebook passengers onto other flights.
  • In most cases, passengers are just out of luck, but in the case of the UK, their Civil
  • Aviation Authority essentially takes the place of any UK airline for the weeks following
  • its collapse.
  • The CAA will either rebook passengers onto another airline or just actually run their
  • own flights.
  • Of course, the CAA doesn’t have their own fleet of planes.
  • Rather, they have a number of airlines around the world essentially on retainer for anytime
  • they need to run repatriation flights.
  • This includes plenty of charter operators like HiFly, Atlas Global, Wamos Air, and more,
  • but perhaps the most unique aircraft used by the CAA was a Malaysian Airlines a380.
  • The airline dedicates some of its a380’s to charter operations and so, the day before
  • Thomas Cook’s collapse, when it became clear that the end was nigh, the a380 flew empty
  • all the way from Kuala Lumpur to Manchester.
  • It landed a couple minutes past midnight on September 23rd, just a few short hours before
  • Thomas Cook was officially declared insolvent.
  • As this and plenty of other aircraft pre-positioned even while Thomas Cook flew its last flights,
  • the CAA was able to start flying its repatriation flights the same day and many passengers were
  • only a few hours delayed, even after their airline went belly-up.
  • The Malaysian a380 was assigned to fly flights from Palma de Mallorca, but part of the difficulty
  • was that, from Palma, Thomas Cook had flown an enormous quantity of flights to an enormous
  • number of destinations in the UK—London, Cardiff, Birmingham, East Midlands, Manchester,
  • Newcastle, Glasgow, and Belfast.
  • Of course, it’s much more complicated to find eight small planes than just one large
  • plane, so that’s what they did—they found the the largest passenger plane in the world.
  • Every flight the a380 flew ran just the two hours from Palma to Manchester and then from
  • Manchester, buses ran to Glasgow, Newcastle, East Midlands, Birmingham, and London.
  • Using this system, with just one aircraft, the CAA was able to run up to three flights
  • a day from Palma to the UK with capacity for nearly 1,500 passengers—the equivalent to
  • almost seven Thomas Cook a321’s.
  • This whole process went on for weeks, making for a lucrative payday for the world’s charter
  • companies and an expensive bill for the UK government, but it certainly is easier than
  • having hundreds of thousands of passengers stranded worldwide.
  • Having a record-breaking airline collapse and then another record-breaking airline collapse
  • in the span of two years is certainly not normal and it’s certainly not a coincidence.
  • Part of the problem is that the airline industry has been so robust in the past decade that
  • it has allowed weaker airlines to survive.
  • Out of the bankrupted airlines mentioned at the start—Monarch, Air Berlin, Primera Air,
  • Cobalt Air, Wow Air, Aigle Azur, XL Airways France, Adria Airways, and Thomas Cook—five
  • were focused on long-haul, low-cost flying.
  • This business model is a rather new phenomenon made possible, at least on paper, by smaller,
  • fuel efficient, long-haul aircraft and low fuel costs but, outside of Asia and Australia,
  • no airline has really achieved sustained profitability with this model.
  • Air Asia X, Scoot, and Jetstar are really the only airlines worldwide that have seen
  • long-term financial success flying long-haul, low cost.
  • After fuel prices plummeted in 2014, these airlines entered a period of rapid expansion
  • as they were able to undercut the incumbents prices significantly, but then, in 2017, fuel
  • prices starting ticking back up and these airlines had a tough choice—they could either
  • raise prices and lose some of the market share they had built up or keep prices the same
  • and grow further away from profitability.
  • Many chose the ladder and, as fuel prices continued to rise, the companies began to
  • fall.
  • Many analysts have also suggested that another contributing factor to this spate of airline
  • collapses is overcapacity.
  • Somewhat as a result of how successful and profitable the industry has been over the
  • past decade, airlines have been buying planes like crazy and investors have been funding
  • airlines like crazy.
  • For a while, the rule had been that adding more capacity means more profits, however,
  • the industry has likely found the ceiling to that rule.
  • This is especially true in Europe’s market where buying an additional plane that you
  • might be able to fill in the summer means paying for it throughout the long winter too,
  • when it might sit empty.
  • What’s for sure, though, is that Thomas Cook will not be the last to fall.
  • It is only getting tougher to survive as an airline, especially in Europe, and each year,
  • without fail, another big name too will topple in September or October—the latest victim
  • in the world’s annual airline culling season.
  • One of the ways that Wendover Productions functions as a business, and stays out of
  • bankruptcy, of course, is through merchandise sales.
  • We sell a few types of t-shirts for both Wendover and Half as Interesting which is a nice, predictable
  • income source that we control.
  • Creating an online store at first seemed daunting, but then we came across Shopify.
  • Shopify is a super simple yet advanced solution to creating and running your online store.
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Start building your online store with Shopify for free for 14 days by signing up at http://shopify.com/wendover

Buy a Wendover Productions t-shirt from our Shopify-powered store: https://standard.tv/collections/wendover-productions/products/wendover-productions-shirt

Listen to Extremities at http://ExtremitiesPodcast.com

Subscribe to Half as Interesting (The other channel from Wendover Productions): https://www.youtube.com/halfasinteresting

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Animation by Josh Sherrington
Sound by Graham Haerther (http://www.Haerther.net)
Thumbnail by Simon Buckmaster

Music by http://epidemicsound.com
Select footage courtesy the AP Archive

References:
[1] https://www.airlines.iata.org/news/iata-forecasts-355bn-net-profit-for-airlines-in-2019
[2] https://blog.aci.aero/airport-markets-and-seasonal-variations/
[3] https://www.macrotrends.net/stocks/charts/RYAAY/ryanair-holdings/gross-profit
[4] https://voxeu.org/article/eu-s-insolvency-reform
[5] https://www.ft.com/content/15ecdab8-c960-11e9-a1f4-3669401ba76f
[6] https://www.ft.com/content/986c4e6e-db81-11e9-8f9b-77216ebe1f17
[7] https://twitter.com/tcairlinesuk?lang=en
[8] https://thepointsguy.co.uk/news/on-thomas-cook-repatriation-flight/
[9] https://web.archive.org/web/20190514055927/https://en.wikipedia.org/wiki/Palma_de_Mallorca_Airport#Airlines_and_destinations
[10] https://thepointsguy.co.uk/news/on-thomas-cook-repatriation-flight/
[11] https://www.seatguru.com/airlines/Malaysia_Airlines/Malaysia_Airlines_Airbus_A380_new.php; https://www.flightradar24.com/data/aircraft/9m-mnf