The Airline Sector by Darren Winters
It amazes me how you can fly from one of the London airports to the South of France or Spain for less than a train ticket from London to Birmingham. Now don’t ask me why you would want to go to any of these destinations, however I like France and Spain!
The point is you’re using an oil-guzzling plane in a time when oil is significantly more expensive than it has been for years, yet you’re paying less.
When I thought about researching this sector I had in mind there would be in the region of 15 to 20 low-cost airlines in Europe. It was rather a shock to find 50, I had stumbled across 50 airlines not including the full fare airlines (if there is such a thing). Bugger! Then there is the US and other world airlines to consider!
Now having studies a number of airline companies whilst doing a module on an MBA course (Laker, SAS, BA etc), I felt reasonably comfortable to say; too many, too cheap, equals losses and failure. Needless to say it did not take me long to work my way down the list before I found my first failure and I was still on the A’s! There it was, Air Polonia, born 1st April 2003, bankrupt by 5th December 2004. They lasted longer than many! I soon discovered it was almost easier to find failures than successes.
The table below shows all the failures I found during 2004. Added to these are a further 34 in 2003, 26 in 2002, 35 in 2001 and 16 in 2000. Now many analysts may put the cause of failure immediately down to the terrorist strikes on September 11th 2001. Whilst without doubt this may have been the catalyst or final straw for many, the truth is the industry was not performing fantastically well beforehand. The real reason for the problems was deregulation by governments. They have allowed companies to complete in a ‘free’ market; brilliant for consumers, bad news for the airlines who were paying their pilots more than top judges were receiving.
Demand has increased in many countries. Even with the high amount of competition we are still seeing airlines increase their passenger numbers. In Europe we are seeing a whole new market open up, albeit in the predominantly low-fare end of business. Southwest, (the original low-cost airline), JetBlue, Easyjet and Ryanair are probably the leaders in the low cost sector on their respective continents. All but JetBlue are low thrills (soon to be no thrills – Ryanair), their strategy has been great service and quality at fair prices with no weekend stopovers required.
Costs have been axed by some, but remain a major sticking point for others. The big six US carriers, American Airlines, Continental, Delta, Northwest, United Airlines and US Airways are all struggling to reduce their high wage bills. United and US Airways are both bankrupt and are only still trading under the strange chapter 11 rules. It looks like Delta might go next if they are not careful. As of the 6th January they are capping fares and removing weekend stopover requirements. This may be a strategic move to force their main competitor on 60% of their routes, US Airlines, to liquidate completely.
We have seen aviation fuel increase by around 30 to 45% in the last year. Now some airlines had the sense to hedge their exposure, others just carried on much as normal. What is for sure, those increases have not all been passed onto the passengers. British Airways may have succeeded collecting a levy but customers do not like it and some have gone elsewhere.
With the number of failures increasing you would not expect another airline to be launched. However, Thomosnfly are jumping on the bandwagon with one-way flights as low as £14.99 to Barcelona commencing in February, They will be offering 11 destinations from a number of small airports such as Coventry and Bournemouth.
The standard-fare airlines in Europe have had attempts at running low cost airlines but have often ended selling them off, as the model does not work using high cost base hubs such as Heathrow. KLM has announced it will be cutting fares from 1st January by 40%. This just goes to show the power the low-cost, low-fare operators are having.
It is not just the airlines that feel the pinch when things go wrong. GE is set to have to write off a significant amount of money if US Airways goes under. AIG the Insurance giant is also in the business of leasing aircraft. As more companies go bust, more of their aircraft could end up parked in California’s Mojave desert. The only saving grace for AIG is that there is always someone new that wants to enter the airline business.
Overall we believe that it is a sector to keep clear of, regardless of the ‘buy’ recommendations from covering brokers for some companies. Companies such as JetBlue have PEG ratios of around 3. Easyjet is well overvalued based on speculation that Icelandair were going to bid for them.
It is a case of survival of the fittest, with low cost bases that give the end customer what they want. This may be high quality, full service flights from central Airports at a premium price as SAS’s old but successful strategy several years ago; or it may be a service with fixed seats, no window blinds, no headrests, no pockets behind the seats and where the passenger carries on his/her own luggage as planned by Ryanair. Whatever, the airline sector is best left alone (or shorted) for now.
Darren Winters
The point is you’re using an oil-guzzling plane in a time when oil is significantly more expensive than it has been for years, yet you’re paying less.
When I thought about researching this sector I had in mind there would be in the region of 15 to 20 low-cost airlines in Europe. It was rather a shock to find 50, I had stumbled across 50 airlines not including the full fare airlines (if there is such a thing). Bugger! Then there is the US and other world airlines to consider!
Now having studies a number of airline companies whilst doing a module on an MBA course (Laker, SAS, BA etc), I felt reasonably comfortable to say; too many, too cheap, equals losses and failure. Needless to say it did not take me long to work my way down the list before I found my first failure and I was still on the A’s! There it was, Air Polonia, born 1st April 2003, bankrupt by 5th December 2004. They lasted longer than many! I soon discovered it was almost easier to find failures than successes.
The table below shows all the failures I found during 2004. Added to these are a further 34 in 2003, 26 in 2002, 35 in 2001 and 16 in 2000. Now many analysts may put the cause of failure immediately down to the terrorist strikes on September 11th 2001. Whilst without doubt this may have been the catalyst or final straw for many, the truth is the industry was not performing fantastically well beforehand. The real reason for the problems was deregulation by governments. They have allowed companies to complete in a ‘free’ market; brilliant for consumers, bad news for the airlines who were paying their pilots more than top judges were receiving.
Demand has increased in many countries. Even with the high amount of competition we are still seeing airlines increase their passenger numbers. In Europe we are seeing a whole new market open up, albeit in the predominantly low-fare end of business. Southwest, (the original low-cost airline), JetBlue, Easyjet and Ryanair are probably the leaders in the low cost sector on their respective continents. All but JetBlue are low thrills (soon to be no thrills – Ryanair), their strategy has been great service and quality at fair prices with no weekend stopovers required.
Costs have been axed by some, but remain a major sticking point for others. The big six US carriers, American Airlines, Continental, Delta, Northwest, United Airlines and US Airways are all struggling to reduce their high wage bills. United and US Airways are both bankrupt and are only still trading under the strange chapter 11 rules. It looks like Delta might go next if they are not careful. As of the 6th January they are capping fares and removing weekend stopover requirements. This may be a strategic move to force their main competitor on 60% of their routes, US Airlines, to liquidate completely.
We have seen aviation fuel increase by around 30 to 45% in the last year. Now some airlines had the sense to hedge their exposure, others just carried on much as normal. What is for sure, those increases have not all been passed onto the passengers. British Airways may have succeeded collecting a levy but customers do not like it and some have gone elsewhere.
With the number of failures increasing you would not expect another airline to be launched. However, Thomosnfly are jumping on the bandwagon with one-way flights as low as £14.99 to Barcelona commencing in February, They will be offering 11 destinations from a number of small airports such as Coventry and Bournemouth.
The standard-fare airlines in Europe have had attempts at running low cost airlines but have often ended selling them off, as the model does not work using high cost base hubs such as Heathrow. KLM has announced it will be cutting fares from 1st January by 40%. This just goes to show the power the low-cost, low-fare operators are having.
It is not just the airlines that feel the pinch when things go wrong. GE is set to have to write off a significant amount of money if US Airways goes under. AIG the Insurance giant is also in the business of leasing aircraft. As more companies go bust, more of their aircraft could end up parked in California’s Mojave desert. The only saving grace for AIG is that there is always someone new that wants to enter the airline business.
Overall we believe that it is a sector to keep clear of, regardless of the ‘buy’ recommendations from covering brokers for some companies. Companies such as JetBlue have PEG ratios of around 3. Easyjet is well overvalued based on speculation that Icelandair were going to bid for them.
It is a case of survival of the fittest, with low cost bases that give the end customer what they want. This may be high quality, full service flights from central Airports at a premium price as SAS’s old but successful strategy several years ago; or it may be a service with fixed seats, no window blinds, no headrests, no pockets behind the seats and where the passenger carries on his/her own luggage as planned by Ryanair. Whatever, the airline sector is best left alone (or shorted) for now.
Darren Winters
posted by Darren Winters at 2:18 PM
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