Written by: Oliver Watts
When we think budget air travel, Ryanair and Easyjet are at the forefront of our minds. The two largest LCC’s (low-cost carriers) in Europe flew a collective total of 210 million passengers in 2017; Ryanair on top at 129 million and Easyjet at 81 million. These however, are just the dominant players. Europe and in fact the world has a plethora of LCC’s who fly millions of business people and holiday makers on their travels each year. Cheap flights means less spending for travellers, but it carries a large burden for the airlines who operate them. Primera Air is the latest low-cost airline to fail in carrying and managing that burden. On 2nd October 2018 it was announced the Scandinavian carrier had ceased operations. This left over 110,000 passengers stranded in Europe and the USA. Primera had only launched flights to from the UK earlier this year. The tragic collapse of Monarch a year earlier is still fresh in the minds of the aviation industry. The Primera collapse only adds to the urgency that fellow LCC’s maintain financial prudence to avoid similar fates. Here we examine the nature of LCC’s, where Primera failed, and what fellow players within the industry can do to stay successful.
What makes LCC’s different
The significant difference between a LCC such as Easyjet and a major flag carrier like British Airways is their operating model. In order to operate whilst charging much lower air fares, an airline needs to be sharp with its strategy. For example, leasing aircraft rather than outright purchase protects the residual cost of the aircraft and releases the airline from certain legal and contractual obligations. In turn it is much cheaper. Major airlines also lease as it is not exclusive to LCC’s but far more common for the latter as part of their strategy. A key aspect of Ryanair and Easyjet’s operating models is to operate a single aircraft type; the Boeing 737NG and Airbus A320 family respectively. This results in optimum pilot, cabin crew and engineer training efficiency, all at lower costs. The equation for the success of an airline, especially a LCC, could be expressed as:
Low operating costs + maximum sales revenue = higher profit
Amongst other things operating costs are inclusive of fuel prices (which are always subject to market fluctuation), airport slot fees and aircraft maintenance. Indeed we need to recognise that tax can take a large proportion of revenue but generally the higher revenue, the less you may lose from taxation subject to jurisdiction. The equation is therefore not flawless but an ideal. LCC’s do not include business and first class sections on their planes but a single economy class. Flat ticket fares are lower but are supplemented by add-ons. These include seat reservation, priority boarding, in-flight food/drink, and the big money maker that is hold baggage charges. Invariably whether budget airline or not you will need these things, but LCC’s make them non-inclusive of the purchased ticket, or do for a higher fare. On the whole their ticketing system is a lot easier in comparison to legacy airlines.
The causes of Primera Air’s collapse
The overarching reason cited is a lack of sustainable growth lead to the airline’s inevitable insolvency. Primera could not secure long term financing. To put this into perspective, airlines are usually stakeholder or privately owned. Take Virgin Atlantic, through their partnership with Delta Airlines, Delta has at least a 49% stake in the company. British Airways is part of the International Airlines Group (IAG) which also owns Aer Lingus, Iberia, LEVEL and Vueling. Primera was part of the Primera Travel Group which has subsidiaries in several countries. In 2014 the Primera Air Travel Group (a separate group) added a subsidiary to the portfolio, Primera Air Nordic, to run parallel to Primera Air. Such consolidation saw their 2015 turnover with just eight aircraft reach $250 million and 5.2 million Euros in pre-tax revenue. So where did the demise occur? One reason is its expansion was too ambitious and growth began to accelerate at an unsustainable level. A LCC who has learnt this is the ever growing Norwegian Air, who decided to slow its expansion plans in light of a profit warning last year. It has turned losses into a net-profit of Nkr 300 million (£28 million) compared to a Nkr 691 million loss the previous year. Primera experienced delays in delivery of brand new Airbus A321NEO aircraft, the catalyst in launching their transatlantic flights. This required leasing older, less fuel efficient aircraft. Little did this help the airline’s brand promotion and demand for its flights departing Birmingham Airport dropped so quickly they scrapped any flights beyond 29th October 2018. These obstacles, in addition to the lack of long term financing, all came to a head on the 2nd October 2018 and the airline announced it had ceased trading; some passengers were boarding their Primera flights only to suddenly find themselves disembarking with no flight to catch.
Lessons to be learnt
Most obvious is LCC’s need to ensure they have a consistent, reliable and secure level of long-term financing. Like any airline they are responsible for attracting and acquiring their own investors so perhaps there is a need for better due diligence, something Primera Air may not have done. The very intricacies of their finances, however, we will probably never know. The airline industry is extremely susceptible to market volatility and nose-dived for several years after 9/11. LCC’s can easily fall into the trap of complacency. There is the general assumption that the demand for cheap flights will be high, and profits will rocket. The stark reality is a lot more complex and operating models need constant review and adaptation to challenges faced, be it higher fuel prices or lower than expected sales. Norwegian Air responded quickly to warnings that it was expanding far too quickly than was financially viable, and refocussed on the need to increase the frequencies of existing routes rather than the variety of destinations. The sad part is Primera had already restructured once before so it is concerning that an effective strategy was not implemented to prevent deep plunges into the red. A large risk of a low-cost model is some airlines find themselves skirting regulations regarding pay and working conditions. Ryanair has been the subject of many a pay dispute strike by its pilots in the past year. This has led to Ryan Air issuing a profit warning to investors only last week. Easyjet seems to avoid such strikes by its crews.
Primera Air is far from the last LCC that will fall in the coming years. With every continent comes a different airline market facing its own challenges; as a result more airlines will fall. To draw on the positives and growth going forward, with every airline collapse there will be a lesson learnt. Whilst the market may be ruthless there is equally vast opportunity for growth. Boeing estimates the world needs over 600,000 new airline pilots in the next 30 years. There are many LCC’s that continue to flourish and grow and to maintain this they need to avoid one trait above all else, complacency.