Low-Cost Airlines Are Crashing into Bankruptcy One After the Other as Financial Conditions Tighten in Europe

But traffic is up, and these are still the good times.

By MC01, a frequent commenter, for WOLF STREET:

Ryanair lowered its 2018 profit guidance from a range between €1.1 billion and €1.2 billion to a range of €1.0 billion to €1.1 billion, in what Ryanair CEO Michael O’Leary called “a disappointment.” While over one billion euro in profit can be hardly called a catastrophe, it’s easy to understand the reasons of Mr O’Leary’s disappointment.

Ryanair saw passengers throughout 2018 grow by 9% to 142 million and “strong ancillary sales,” meaning sales of additional services such as premium seats with more legroom and on-board catering. In spite of all the bad publicity – for example, Ryanair was named “worst short-haul airline” a couple of weeks ago — it remains not merely Europe’s most popular low-cost carrier, but also a model for turning what has long been considered a loss-making enterprise into a profitable business.

Ryanair’s lower than expected profits are the result of a price war with a host of competitors; many of them do not seem to care about profits (or breaking even) and seem to have access to nearly unlimited capital. Until they don’t.

Ryanair also warned that Laudamotion, whose purchase it finalized last year after much drama, will incur “extraordinary” financial losses in the €150-140 million range for 2018, thus confirming Laudamotion’s previous financial record as a loss-maker.

This also raises an interesting question: Why would a profit-focused company such as Ryanair bother with acquiring a cash-burning machine? While Ryanair has buried the reasons for this unusual purchase under a thick layer of corporate-speak, the most likely reason is that Ryanair wanted Laudamotion’s routes from Austria and Germany to vacation destinations in Greece, Morocco, Portugal and especially Spain, and wanted them soon enough to put up with Laudamotion’s well known financial issues.

As Michael O’Leary so wisely said on several occasions, Europe suffers from “short-haul overcapacity” and Ryanair has to deal with literally dozens of “loss-making competitors,” no doubt owing their survival and expansion to those highly repressed financial conditions that have fueled the “Everything Bubble.”

But these “loss-making” airlines have started to feel the pinch, more from their own assorted financial shenanigans and excessively ambitious expansion plans than from tightening financial conditions.

Small Planet Group, the Lithuania-based owner of the Small Planet-branded family of airlines, announced on 24 October 2018 that it was seeking bankruptcy protection. The group had already accumulated over €17 million in debt by the end of 2017.

Less than a month later, operations of the Cambodian, German, and Polish subsidiaries ceased and on 28 November 2018, after a Vilnius bankruptcy court rejected the debt restructuring deal offered by Small Planet, the civil aviation authority of Lithuania revoked Small Planet’s commercial license, effectively putting an end to the company’s operations.

Germania, a Berlin-based airline once known as SAT (Special Air Transport), announced on 8 January 2019 that it may have to liquidate “short-term” unless a buyer is found due to having accumulated heavy losses for every operating year starting in 2013 and being short on liquidity.

Germania used to be an unexciting but profitable airline until the owners fell victim to a common disease in the airline business: overexpansion. This frenzied expansion may have brought higher revenues, but completely wiped out profits and turned them into steady losses, which have oscillated between €7 million and €26 million for every year since 2013.

At the moment Germania operates 34 aircraft and has a 25 Airbus A320neo on order, and this does not include their subsidiaries, leasing-focused Bulgarian Lynx and Swiss-based Germania Flug. That’s quite a large fleet, and it was mostly built up over the past five years, exactly as competition was rising all over Europe and as European monetary policies entered full-on lunacy.

This same monetary lunacy has fueled all sorts of financial shenanigans and lent credibility to dubious business schemes that would have otherwise found nobody willing to finance them.

VLM Airlines, for example, which is already defunct. Brussels-based VLM was born in 2014, when the Air France-KLM Group decided to sell off their CityJet subsidiary to a group of private investors. These new owners split CityJet in two, with VLM Airlines becoming the leasing arm of the group. However, in late 2014, VLM Airlines became an independent entity following a management buyout and started to implement what I can only call an interesting business model: taking over routes that had been dropped by other airlines for being unprofitable and/or in low demand.

For example in February 2016 VLM took over three routes from Friedrichshafen which had been previously been operated by Intersky, a regional airline which had recently gone bankrupt.

As it turns out, those routes were dropped for a valid reason, and in May 2016 VLM Airlines entered bankruptcy protection after accumulating €6 million in debts, which may not sound like much but for a two years-old airline which at the time had just four regional airliners (two of them leased) it was too much. That should have been the end of it.

VLM’s second short life...  In September 2016, SHS Aviation, a Dutch company, announced the purchase of VLM Airlines while the industry scratched its collective head over the reasons behind this purchase.

Following an ill-judged bout of expansion which saw among other things VLM take over the remains of Thomas Cook’s Belgian operations in October 2017, the airline started to have serious liquidity issues which a desperate change of ownership in August 2018 could not solve, so in December 2018, VLM Airlines finally filed for bankruptcy.

Investors are going to be wiped out as VLM had been stripped bare of assets to raise desperately needed cash in its last year of operation.

Norwegian Air Shuttle, the airline version of Netflix, announced on 19 January 2019 the closure of its bases in Rome (Italy), Providence (USA), Stewart (Canada), Gran Canaria, Palma de Mallorca and Tenerife (all in Spain) as a cost-cutting measure. The closure of the Rome base is a particular heavy blow, as it was one of the linchpins of Norwegian’s expansion in the long-haul market. Ironically, the choice of Rome was dictated by the shaky financial conditions of Italy’s flag carrier, Alitalia, whose history and eventual bankruptcy would be well worthy of an interminable TV series with a highly convoluted plot.

And as Norwegian’s financial woes continue (2018 financial results will be released in February, as is usual with Norwegian public companies), the whole maxi-order for 95 Airbus A320neo is being “reconsidered.”

Very much like Netflix, Norwegian is a media darling that can do no wrong. The closure of these bases and the financial backing (or lack of) for such a huge aircraft order have been completely buried by a far more important piece of news: Norwegian will be upgrading the free WiFi service on many of their flights. Obviously, no mention of how a company with serious cashflow issues is going to be able to offer customers more freebies.

If you are scratching your head as to why stock markets are partying like it’s January 2018 while bad news pile up from China to Germany, look no further.

Joon… Air France announced that it is shutting down its Joon brand: The aircraft and the crews will be quietly absorbed back into Air France and the experiment hopefully forgotten. Joon operations began in December 2017.

Joon was an attempt to build a “fashionable” low cost carrier which failed miserably due to no real cost savings over any legacy carrier: Flight crews were paid exactly the same as Air France’s but were made to wear uniforms made from 60% recycled plastic, aircraft were mostly older Airbus models with ever increasing maintenance costs, and catering turned out to be a financial black hole.

Instead of either giving passengers simple prepackaged food and drinks (like Peach) or just having them pay for refreshments (like Ryanair), Joon offered a choice of highly fashionable organic food and drink, including craft beer “loaded with obscene amounts of hops” according to those who tried it.

Joon was instantly branded “a flying rooftop bar” and made the butt of endless jokes but, most critically, turned out to be an embarrassing failure for Air France’s old management, now firmly in the sights of the new CEO, Benjamin Smith (formerly of Air Canada).

And remember: In spite of all the wailing and gnashing of teeth, these are still good times. Credit conditions throughout Europe remain extraordinarily favorable and any Quantitative Tightening is still in the distant future together with any interest rate “normalization.” Passenger numbers, no doubt buoyed by incredibly low fares offered by low cost carriers, keep on rising.

But the “profitless growth” model has finally started to show its limits, and I fully expect many other airlines with questionable business models to join the Small Planet, Azur Air Germany, Primera Air and SkyWork of this world in bankruptcy court. By MC01, a frequent commenter, for WOLF STREET

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