Flybe saved: but why is the airline industry struggling?

The government has agreed a last-minute rescue plan for Flybe that allows the troubled UK airline to delay paying an outstanding £106m air passenger duty bill until the spring.

Business Secretary Andrea Leadsom says the move will allow Flybe to ride out a cashflow crisis – which will be a “relief to many of the eight million passengers who fly with the airline each year”, the BBC reports.

But when it comes to airlines on the brink, Flybe is one of the lucky ones. The past year alone has seen UK airlines Flybmi and Thomas Cook both collapse under insurmountable debts. A further seven major airlines have gone bankrupt across Europe since 2017, including Primera and Wow Air, says Reuters.

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There has been a growing backlash against the Flybe rescue, with rivals EasyJet and Ryanair saying taxpayer funds should not be used to save their competitor. British Airways owner International Airlines Group (IAG) has even filed a complaint to the EU saying the move breaches state aid rules.

But why are so many airlines struggling to stay in business?

Rising costs

The aviation industry is in a difficult spot at the moment, with rising costs negating significant and steady passenger growth, says Loizos Heracleous, professor of strategy at Warwick Business School.

“Aeroplanes are expensive assets with few alternative uses, which limits the ability of airlines to reduce their capacity during lean periods,” he writes in an article for The Conversation, “compared to, say, a manufacturing business that can close a plant and lay off workers.

“Airlines also have to deal with fluctuating expenses like fuel, which accounts for around a third of total costs.”

More controversial is the UK’s air passenger duty (APD), a tax on aviation introduced in 1994. The levy is charged per passenger on flights taking off in the UK – from £13 in short-haul economy to £528 for a long-haul first-class flight – and has been deemed problematic for regional and domestic-focused airlines such as Flybe, for whom the tax will apply to both the outbound and return legs of a flight.

The Guardian says that, for example, “a return flight from Cardiff to Manchester is taxed at £26, while an international return flight from the UK to Moscow costs just £13 in APD”.

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The budget conundrum

Offering low or no-frills flights in exchange for exceptionally low ticket prices is a tightrope act that is coming back to bite a number of brands.

Investopedia explains that the competition that has driven European ticket costs down and seen the rise of budget airlines has cost a number of brands dearly from a reputation perspective, with some deemed to have cut too many corners.

“Long lines due to security procedures at check-in, cramped seating, inconvenient schedules, poor service – the list of airline travellers' complaints is a lengthy one,” the investment website says. “The perception that air travel is an ordeal makes it very difficult for airlines to charge the higher prices that are necessary to return to profitability.

“Social media has propelled a number of what can only be described as PR disasters recently, and undoubtedly caused harm to the industry.”

Even UK flag-carrying stalwart British Airways has fallen foul of this issue in recent years. In 2015 it was awarded the best short-haul airline title in the annual Which? Travel survey, but – among other issues – a significant business strategy shift introduced by current CEO Alex Cruz including charging for food has caused the airline’s approval ratings to plummet. This year, British Airways slumped to third last place in the Which? poll of customer satisfaction with major short-haul airlines, with only Ryanair and Vueling faring worse.

Winter blues

Furthermore, budget airlines are almost entirely regional and do not operate long-haul flights, meaning they experience a very clear high and low season. This is in contrast to many major long-haul airlines, which operate in both hemispheres and thus effectively take advantage of two high seasons.

Aviation Analyst reports that after a busy spring/summer high season that could keep a failing airline afloat, the end of summer is often a “make it or break it” time for a budget airline, as its “board members determine the amount of cash needed to carry the airline through a quieter winter period – where demand lowers and flights may struggle to break even”.

The site adds: “Winter is a difficult time for any European airline, given the lower demand but continuing high costs, but the season is even more of a challenge for the financially fragile players of the airline market.”

Why are some airlines booming?

While many budget airlines collapsed this past year, the IAG, which owns British Airways, Iberia, Vueling and Aer Lingus, filed a 20% rise in pre-tax second-quarter profits last year, on the back of revenues rising 9.5% to €6.7bn.

This is an example of larger airlines benefiting from a booming passenger market without cutting corners in order to slash prices.

National Geographic reports that by 2035 annual air travel is predicted to double, noting that “growth in mature markets like Europe and North America will be more incremental, with existing passengers flying more”, while “China, India, and Indonesia will see more first-time fliers”.

These larger airlines are mostly relying on their long-haul flights, a market dominated by more established names. Quartz reports that “around the world, long-haul, low-cost airlines are barely getting by”, partly due to the high/low season issue and partly because, simply put: “Passengers aren’t always convinced of the value of sacrificing comfort for eight hours at a time.”

The site adds that the budget model “simply doesn’t work for long haul operations”.