In the end, Flybe’s fall was no surprise, though the announcement undoubtedly shocked some.
The carrier only just managed to avoid its life support machine being switched off in January. But the coronavirus outbreak was just too much for the airline, and at 3:30 am on Thursday, it announced it had gone into administration.
The collapse comes just a few months after the world’s oldest travel company Thomas Cook, which had its own airline, was liquidated after 178 years in business.
Other British airlines to have been grounded in recent years include Flybmi, which ceased trading in February in last year, and Monarch, whose downfall in 2017 left about 110,000 travellers stranded abroad.
A slump in passenger numbers as a result of coronavirus has led to an increase in airlines running half-full, or even ‘ghost’ flights
Their crash has come during a tough few years for both the British and international airline industry. Just in the last month alone, global airline stocks have plunged by a quarter, or $40.6billion, largely because of the coronavirus.
But as AJ Bell’s Russ Mould notes, even before the Covid-19 illness, ‘the industry had started to struggle, weighed down by its own optimistic capacity expansion and increased price competition.’
Denmark’s Primera, Iceland’s Wow Air and Air Berlin have all gone by the wayside. Others like Air India and Alitalia are barely hanging on.
Airlines have gone bust despite the fact demand has continued to grow, rising 6.5 per cent in 2018, according to the International Air Transport Association (IATA). So how come so many airlines are failing while passenger numbers are booming?
Ralph Hollister, a travel and tourism analyst at GlobalData, says costs are one of the main weaknesses afflicting the sector. Maintenance costs are high, while the falling pound has made foreign holidays more expensive.
Flybe has struggled for years, but it was the coronavirus which ultimately caused its collapse
The traditional bugbear of fuel price rises though is causing trouble. Generally, when oil prices are low, carriers prosper, but they struggle when they rise. The early-90s oil price rise following the Gulf War helped cause some of America’s most famous airlines, including Pan Am, Midway, and Eastern Air Lines to fold.
Since 2016, the value of Brent Crude oil jumped from below $30 a barrel to $85 a barrel in October 2018, before falling back to an average $64 for most of 2019. This has caused a significant dent in the sector’s profits.
British airlines’ fuel costs have been further exacerbated though by the falling pound following the Brexit referendum because oil is denominated in dollars.
Before June 2016, sterling was hovering above the $1.50 mark, but since then, has drifted around the $1.30 level, making oil purchases far more expensive.
Fuel costs alone are unlikely to cause airlines to go bankrupt though. But Black Swan events like 9/11 and the Covid-19 epidemic will usually compound airlines suffering immense cost pressures.
Hong Kong flag carrier Cathay Pacific has been severely impacted by the coronavirus, with hundreds of flights cut and 27,000 staff asked to take unpaid leave. Yesterday, it said its Vancouver cabin crew base would close with the loss of 147 jobs.
Cathay Pacific was already under great financial stress, having made large yearly losses in 2017 and 2018, and cut positions. This is only likely to be severely aggravated by Covid-19, which will hurt Asian airlines the most.
IATA recently updated its analysis of the predicted financial impact of the virus. It estimates global revenue losses to be between $63billion and $113billion this year, with Asia Pacific airlines the most harmed.
Declining fuel costs may be a saviour for some airlines though because the virus has caused oil prices to fall. IATA says the drop in oil could save airlines $28billion.
But it warns that this ‘would not significantly cushion the devastating impact that Covid-19 is having on demand. And it should be noted that hedging practices will postpone this impact for many airlines.’
‘Flight shame’ is causing more people to use more eco-friendly transport alternatives
So even if fuel costs were to fall, airlines will still have to contend with dwindling passenger numbers. Pictures of half-empty and even ‘ghost flights’ have been doing the rounds on Twitter in recent days.
Half-deserted flights are terrible for budget airlines whose profits per passenger are small, says Dr Roger Tyers, a postdoctoral research fellow at the University of Southampton, whose specialises on effects green regulation has on the aviation industry.
‘I think the ones that are most vulnerable are the budget airlines who often make less than £10 per person per flight, and they need full planes to be profitable,’ he told This is Money.
This was one of the biggest problems for former British regional airline Flybmi, whose flights were often less than half-full. In its final year in operation, its average passenger load was just 18, as travellers chose cheaper rivals.
‘It doesn’t take many people to stop flying, whether for the virus or because climate change for those groups to become unprofitable,’ Tyers adds.
Dr Tyers is himself trying to avoid flying, because of its environmental impact and believes global warming concerns are likely slowing the increase in demand for air travel, though certainly not as much as the coronavirus.
Like Ralph Hollister, he does not think the surging level of ‘flight shame’ has made a major impact on demand, but Tyers thinks the coronavirus and the growing environmental movement could make people question their use of aeroplanes.
Guernsey airline Aurigny declared this morning that two new permanent direct air services will run from Guernsey to Exeter and Birmingham
He says the coronavirus ‘highlights [just] how fragile the industry is and how it does rely on many trips which are frankly quite avoidable and quite unnecessary.’
He points to recent research from Dr Steffan Gossling that drew on a survey of international students at Lund University in Sweden who were frequent fliers.
Gossling found that 58 per cent of flights taken over six years by the students were considered important in some way, while 21 per cent were either of limited or no importance.
If therefore a large minority of flights we take are not important, and those planes are damaging the planet, then more people might be reluctant to fly more. Domestic UK tourism may be an unintended beneficiary, something Dr Tyers welcomes.
This will inevitably be the ‘tipping point’ for some businesses operating tight margins or experiencing financial difficulties in the ultra-competitive airline industry, writes insolvency lawyer Michael Mulligan.
‘Flybe’s collapse is the fourth significant UK airline failure since 2017. Whilst the impact of the coronavirus outbreak on demand for air travel was only partly to blame for its collapse, it is clear that the industry is going to take a savage hit in the coming weeks and months,’ he stated.
Some airlines will likely collapse while others will merge with larger players in the field, leaving a few businesses dominating an even greater share of the market.
A demosntrator outside the Court of Appeal on the day the court ruled that the proposed third runway at Heathrow was illegal on environmental grounds
Small or medium-sized airlines could swallow up slots formerly held by the bust air carriers. Guernsey airline Aurigny declared this morning that two new permanent direct air services will run from Guernsey to Exeter and Birmingham.
Aurigny chief executive Mark Darby said: ‘We believe that maintaining Guernsey’s connectivity is key and with the collapse of Flybe it is an unmissable opportunity for Aurigny to provide a valuable customer service while at the same time increasing our operation and improving our financial position.’
But reform is still necessary. In the longer term, reforms made to air passenger duty (APD) rates to help offset some of the difficulties affecting the sector. APD raises billions of pounds for the Treasury each year but is blamed by airlines for reducing demand for flights.
More controversially, airport expansion would bring enormous benefits to airlines and the world economy. There is little appetite for this though, for understandable environmental reasons.
Court judgements don’t help either. The Court of Appeal’s recent decision ruling the proposed third runway at Heathrow illegal may have killed off further development at the airport for good.
But whatever side you are on regarding airport expansion, whether you think expansion is necessary to enhance trade links or must be halted for environmental reasons, the airline industry has a very challenging 2020 ahead.
The business will carry on, but its environmental burden and soaring costs will weigh on airlines for many years to come, however destructive the coronavirus is.
Flybe is very unlikely to be the last to go under.
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