Another one bites the dust

The latest casualty of high fuel costs and the financial squeeze is UK airline/tour operator, XL. Aviation correspondent Michael Sterling considers how airports will cope with increasing numbers of failing airlines.

“When the tide goes out, you can see who’s wearing a bathing suit and who isn’t,” says French finance minister Christine Lagarde recently, referring to the global airline industry. The latest airline to be caught by the tide is XL.

Many see the failure of the UK’s XL as a harbinger of things to come. The budget carrier and holiday operator shocked the travel industry when it was forced into administration, a casualty of soaring aviation fuel prices and a slide in consumer spending.

Warning signs

But the signs were there for everyone to see.

Cancellations of once-popular routes and intense competition drove the company to the wall. It is one of more than 30 airlines that have gone out of business this year. The smart money predicts that more will follow.

XL’s crash landing came just days after Spanish charter carrier Futura International Airways slipped into administration, while Canadian carrier Zoom Airlines failed last month and Silverjet, the business-class only airline, ended its run in May.

XL operated a fleet of more than 20 aircraft and was the UK’s third-biggest tour operator when measured by market share, behind TUI Travel and Thomas Cook. It was more of an airline than a travel operator and as such was more exposed to fuel price inflation. The prices that airlines are currently paying for fuel amount to around 40% to 50% of their costs. Competitors TUI and Thomas Cook are more geared to making their profits from holidays rather than air travel and are more insulated from the present crisis.

But the going is tough and airports are feeling the cold winds of recession blowing through their businesses.

Survival of the fittest

The International Air Transport Association (IATA) projects that the world’s airlines will together lose US$5.2 billion this year, and a further US$4.1 billion next year as the economic storm buffets the industry. The coming northern hemisphere winter is a time when the industry becomes cash-negative after building cash during the summer. EasyJet, just days ago, warned that it expected slower growth this winter.

To survive, there has to be consolidation, as the world’s biggest merchant banks are finding. The global carriers are jostling for position and new alliances are being forged. Alitalia is tottering on the brink, a hostage to its unions; Greece’s Olympic Air is set to be privatised; Lufthansa is taking a stake in Brussels Airlines and is part of a consortium to buy into Austrian airline AUA; and Scandinavian airline SAS is also being sold.

Fewer airlines, more demands

What does this mean for airports? XL had a large presence at London’s Gatwick Airport and while its absence will be felt, the airport is experiencing convolutions itself as operator BAA is pushed into selling it to pacify UK competition authorities.

The danger is that weaker budget airlines will become the victims as the larger carriers join together to survive the economic downturn. Airports will be faced with more demands for lower fees and more dependence on fewer and bigger airline customers.

But the cost squeeze on airlines isn’t producing reduced capacity despite the failures. The latest data from European airlines shows that airline capacity, measured by available seat kilometers, is still showing a year-on-year increase of 4%. The number of passengers is up just 1% over the same period. Despite the headwind, airlines are adding more seats this winter. Low-cost carriers, as well as bigger airlines, are adding rather than trimming capacity and cutting ticket prices in an effort to drive less able competitors out of business.

Airports can therefore expect more airline failures, but are likely to see the number of passengers moving through their terminals higher than expected.
 

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