The airline industry is notoriously vulnerable to external shocks like political unrest and natural disasters, but it does tend to move in business cycles of 8 to 10 years — and the current uptrend that started in 2009 will end this year, experts have warned.
The main question is how strong the downturn will be. Daniel Roeska, an aviation analyst at Bernstein Research, said it could be considerable because airline managers have failed to consolidate rigorously enough.
In fact, there’s been no real consolidation in Europe for decades, and that’s not changing even though a record number of players have disappeared with Air Berlin, Monarch, Small Planet, Primera Air and other airlines going bust.
One might think that their absence would reduce the supply of tickets, but it doesn’t because airlines tend to respond to insolvencies by securing their bankrupt peers’ takeoff and landing slots. After all, experience shows that only the top two airlines at an airport can turn a reliable profit. And because the slots have to be used or they’ll be lost, the European industry always struggles to cut capacity, making it nigh-on impossible for airlines to raise ticket fares.
“We predict that capacity growth will remain strong in both short-haul and long-haul routes which makes it difficult to raise average revenues,” said Roeska who has warned in his recent research notes that the market is beset with a “flood of planes.”
He said Europe will likely keep on consolidating but has a long way to go to match the US where the market is dominated by just four airlines which control 75 percent, making them far more profitable than their European counterparts.
Expanding services to strengthen one’s market position is a risky strategy but the Europeans are expected to stick to it for the time being. Lufthansa CEO Carsten Spohr recently said he plans to raise prices at the budget end of the market. But rivals including Dimitrios Gerogiannis, the CEO of Greece’s Aegean Airlines, doubt whether that will be possible given the current glut of planes.
The problem is that raising revenues will be more important than ever in 2019 because the environment is likely to turn a lot more turbulent in the coming months. The price of kerosene surged 65 percent in the two years to November 2018 and Roeska expects it to keep on increasing over the next 24 months at least.
Wage costs are also rising, especially in the budget segment where Ryanair has been forced by strikes among its disgruntled staff to agree wage deals in many European countries. The exact impact is unclear but there’s no doubt Ryanair’s wage bill will go up.
Analysts including Roeska said the tables are turning within the industry. Conventional airlines have managed to strengthen their market position in the latest consolidation which has given them an edge over budget rivals that had been enjoying years of growth and profit increases due to their cost advantages.
But times are about to get tougher for the entire industry, and all airlines face a further obstacle: infrastructure bottlenecks on the ground and in the air. Delays over the summer of 2018 highlighted chronic shortages of air traffic control and ground staff, especially in Germany, and that’s unlikely to change in 2019, meaning further delays and cancellations that will cost airlines dear.
Major new investment is needed in infrastructure and pay needs to be increased to attract more staff. At current rates it’s hard to find people prepared to haul baggage on and off planes, and security staff are set to push through higher wages in current pay talks. All these cost increases for air traffic control, ground services and aviation authorities are bound to be passed on to the airlines, at least in part.
Nevertheless, Roeska doesn’t expect the market to implode — provided the global economy remains broadly stable. “The capacity growth isn’t enough to cause a collapse,” he wrote in a research report. Airlines can at least draw a little comfort from that.
Jens Koenen covers aviation for Handelsblatt. To contact the author: [email protected].