October 25, 2018
These comments from BOC Aviation’s MD & CEO Robert Martin, confirm what we are seeing, and that is shake out of small weak carriers just cannot compete effectively with small fleets, usually high debts and little equity or ability to raise more cash.
Of the roughly 833 airlines (changes every year quickly) in the world today, only 292 (35%) are IATA members, with 415 airlines operating 10+ aircraft.
Most of the 541 airlines (65%) are small privately owned operations, usually in a niche geographic region and to small in most part for commercial jets, and run everything from Cessna Caravans, BN2 Islanders to regional jets in some cases.
But there are also a lot of Cargo and LCC airlines in that 541 as well, that run B737/A320’s to B747/B777F, so the industry is highly competitive and diverse and constantly changing.
As of the end of 2017, there were 20 x ACMI airlines, 78 x Leisure airlines, 108 x Cargo airlines, 111 x LCC (low cost carriers), 225 x Mainline airlines and 291 x regional airlines.
As a lessor, BOC Aviation gets a lot of inquiries from start-ups, and that is always a high risk for a lessor or investor.
The airline needs to demonstrate to itself and its investors and stakeholders that:
1. It has a viable Business Model that is sustainable in the long term, I have worked with several start-ups and seen horrible Business Models, that made no sense.
2. Management, you need experienced executives to execute/implement the Business Plan/Model, too many people want to start an airline, few ever do, because they have no experience in the industry and many have never run a business themselves or even have any business education and have poor preconceived ideas on business models that many times make little to no sense.
3. Equity, you need lots of money, no you no longer need $10 million to make $1 million, time shave changed, the industry is a lot more profitable today, but you still need cash, liquidity is a must, and ideally a shareholder that has lots of money, deep pockets in the early start-up phase to build up ‘critical’ mass, as we see with Norwegian Air, WOW Air today, both bleeding cash as they grow quickly trying to get to ‘critical mass’ as quickly as possible. CEO of WOW Air, Mr. Skuli Mogensen, has rightly said “The airline business is a size game”, and it is so true, as we are about to see small European airlines fade away, either through bankruptcies or mergers and acquisitions IF they are lucky. The airline business is about cash flow and managing your debts, again look at recent Primera Air and Cobalt, they shut down when an investor said NO to new cash, Small Planet Airlines, Jet Airways are both seeking also new investors to save them, they run out of cash and then scramble at the last minute to sell anything to stay afloat while “hoping” for a “white knight”, which rarely works and the end comes fast.
4. The competitive environment is tough, look at Small Planet Airlines today, the ACMI market is good but now very competitive, especially the northern Winter season when European demand is down and everyone scrambles for Winter ACMI contracts in warmer climates at very low ACMI rates, but it beats parking the aircraft for 5 months.
5. Now add global crisis like increasing fuel prices, stagnant or declining yields (e.g India) where even high load factors add up to RASK<CASK, the strengthening $US causes weaker local currencies, making local expenses in $US that much higher. Now some countries are experiencing regional recessions, Argentina has 60% interest rate, 40% inflation rate, $US + 50 billion in World Bank/IMF loans again? you think its going to be a good airline market? Norwegian, LATAM, Avianca, flybondi and Aerolineas Argentinas are sadly about to experience hell in 2019 in Argentina, as that market was ready for a big boom in 2019, but now forget it.
This is the wonderful world of aviation , so you still want to own an airline? I have worked with 50+ airlines from small floatplane operations, regional airlines to flag carriers, and its always challenging and happy to say mostly rewarding, but it has to be run professionally and by the numbers (yields, load factors, CASK), a competitive proposition, a good network, right sized aircraft and fleet and as little competition as possible is nice!
BOC Aviation MD & CEO Robert Martin says that this decade alone there have been ‘301 airline failures’, and that number is rising;
That number is rather alarming and equates to more than two airline failures per month, but most had not reached critical mass, according to Mr Martin;
The executive says February and October/November are acknowledged as the most likely windows for airline collapses through the year;
This time last year we had the major collapses of airberlin and Monarch Airlines. This year the largest failures, among others, have been Primera Air and Cobalt Air.
That number is rather alarming and equates to more than two airline failures per month during the 2010s. However, Mr Martin notes that many of these would have escaped widespread media attention.
Adding context to the numbers, he highlighted that most of these were operators that were unable to reach a level of critical mass and many only had small aircraft fleets. “Around 90% didn’t hit the point of critical mass,” he stated.
We are currently at two of the big windows for collapses with February and October/November the most likely times that an airline will fail, according to the executive. “We tend to watch those periods very, very carefully,” he explained. “We also watch, in particular, the liability side of the balance sheets. That’s the crucial part. Airlines don’t tend to fall over due to lack of revenue. They fall over because they can’t meet their liabilities.”
His comments on the scale of airline failures were part of a discussion on LCC fleet financing at CAPA’s inaugural Low Cost Long Haul Global Summit where he was joined on the stage DVB Bank’s SVP aviation financial consultancy, Albert Muntane Casanova and industry stalwart Steven Udvar-Hazy, executive chairman, Air Lease Corporation.
Air Lease Corporation is one of the industry’s biggest lessors and Steven Udvar-Hazy one of the most respected leaders in the industry. He highlighted that smaller airlines are facing a “huge cash flow challenge”. He said that credit card providers are holding back funds from smaller operators and start-ups. “The airline may sell a ticket purchase by credit card, but it does not have access to that cash until the service is performed. Sometimes until well after the flight has operated,” he added.
The discussion painted a balanced outlook for the industry, but Mr Martin warned that “the party’s over,” in terms of low interest rates. However, he noted that world GDP growth is more balanced than at any time in history. As such, BOC Aviation does not expect any global recession in the short term, but Mr Martin said there will be “pockets” of recession in individual countries and regions.
For BOC Aviation – like all lessor and financiers – there is a significant amount of due diligence that is completed before working with an airline partner. Mr Martin said the company considers some main elements when considering a new airline customer: the business model, the ability of management to execute the strategic plan and the carrier’s cash flow and source of liquidity. Additionally, it also considers competition and the airline’s ability to weather the inevitable competitive response to its entry into the market.
It is clear that airline collapses are not as unexpected as in the past and the industry is much better prepared to recover from a failure, whether that being rescue fares for passengers, airlines back-filing capacity voids or lessors and financiers finding homes for recovered aircraft.