The list of airlines that weren't so lucky is even longer. Considering the vital nature of the service it provides and its invaluable contribution to making the world a smaller place, why is the airline industry synonymous with ongoing losses and insolvency? We list four reasons why airlines are always struggling. An industry that has been known to be unprofitable for decades would be eventually forced by market participants to undergo consolidation and rationalization in an attempt to find a better way to do business.
Not so for the airline industry, for whom this basic business precept does not seem to fly, so to speak. Many unprofitable airlines continue to remain in business despite years of substantial losses, because various stakeholders cannot afford to let them close.
Closing down a large unprofitable airline would involve the loss of thousands of jobs, inconvenience to hundreds of thousands of travelers, and millions in losses for the airline's creditors. Not to mention the loss of national pride if the airline in question is a national carrier. Because closing down a floundering airline is a politically unpalatable decision, governments will usually provide it with a financial lifeline to stay in business.
But struggling airlines often have to resort to cut-throat pricing to fill up their excess capacity, and as a result, even the stronger players in the industry are adversely affected by this lack of pricing power. Aircraft are very expensive pieces of equipment, and airlines have to continue making large lease or loan repayments regardless of business conditions.
Large commercial jets can have a lifetime as long as years. Airlines also need large labor forces to run their complex operations, making payroll expenses another component of relatively fixed costs that have to be incurred month after month. Volatility in oil prices is yet another challenge that airlines have to contend with See also: 4 Ways Airlines Hedge Against Oil. The airline industry is particularly vulnerable to exogenous events such as terrorism, political instabilities and natural disaster, which can drastically affect their operations and passenger demand.
A leading-edge research firm focused on digital transformation. Good Subscriber Account active since Shortcuts. Account icon An icon in the shape of a person's head and shoulders. It often indicates a user profile. Log out. US Markets Loading H M S In the news. David Slotnick. The aviation consultant CAPA warned that "most" of the world's airlines could be bankrupt by the end of May, due to the ongoing coronavirus pandemic. The latest was Avianca, which declared bankruptcy but said it hopes to resume operations after the outbreak ends.
Visit Business Insider's homepage for more stories. Log out. US Markets Loading H M S In the news. Benjamin Zhang. Sign up for notifications from Insider! Stay up to date with what you want to know. Loading Something is loading. Sobie said many airlines were already struggling before the pandemic hit, but they now have a "better chance at survival" because of government help. Despite the financial aid, however, the outlook for the rest of is "not encouraging," Morris said. The first and fourth quarters are "the hardest" because most of the revenue is generated in the second and third quarters.
The goal for airlines now is to "survive at any cost" and see if the summer of brings solutions or higher demand. Brendan Sobie of Sobie Aviation agreed with the prediction, and said some governments may be reluctant to bail airlines out a second time. The number of bankruptcies and collapses should be manageable and also spread out over a relatively long period of time," he said.
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