The September Airline Massacre in Europe

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And these are still the good times, with growing passenger traffic.

By MC01, a frequent commenter on WOLF STREET:

Today, Adria Airways, three years after being privatized.

On September 24, Slovenia’s Adria Airways, which has long been dogged by insolvency worries, “temporarily” suspended all operations as it is “intensively searching” for new capital from unidentified “potential investors.” On September 20, two planes had been grounded after the airline defaulted on the lease contract.

The Slovenian government privatized the airline by selling it to German PE firm 4K Invest in 2016. Since then, the company sold all its planes and has been operating with leased planes. In February 2019, ownership changed to STBE, which had previously bought the airline’s brand name. The Slovenian government said that it would not bail out the airline as it would violate EU rules on state aid.

Yesterday, the Thomas Cook airlines.

On September 23, after Thomas Cook Group collapsed and entered liquidationThomas Cook Airlines and Thomas Cook Airlines Scandinavia halted operations. Thomas Cook Airlines Scandinavia was hastily spun off from Thomas Cook Group as part of the liquidation and is said to be resuming flights today. Thomas Cook Airlines remains shut down.

The Thomas Cook group wholly owned three airlines: One registered in the UK (Thomas Cook Airways), one registered in Sweden (Thomas Cook Scandinavia), and another in Spain (Thomas Cook Balearics). Thomas Cook also owned 50% of German leisure airline Condor Flugdienst.

Condor Flugdienst is still operative but struggling to stay alive and is pressuring the German government for a “bridge loan,” effectively a short-term bailout. While the Lufthansa group is “reported” to be interested in Condor, the only valuable asset the company has left are the routes, and those can be acquired at a discount during a liquidation procedure.

This is exactly what happened during the liquidation of Germania earlier this year: Interested parties held off their offers until the liquidation process had started.

These four Thomas-Cook affiliated airlines combined had a fleet of 116 aircraft. All but 5 were leased. As it so often happens these days Thomas Cook vastly underestimated the real costs of leasing. Like other loss-making airlines, such as Alitalia, the airlines sold their own aircraft and leased them back to raise quick cash, causing leasing costs to spiral out of control over the years.

Yesterday, France’s XL Airways.

Also on September 23, French airline XL Airways, ceased all operations, after having announced on September 19 that ticket sales stopped due to “great financial difficulties.”

Back in April the company had announced ambitious expansion plans which included new aircraft, new cabin layouts, and new routes which now will most likely sound like a cruel joke to the company’s employees.

In December 2016, XL Airways merged with business-oriented airline La Compagnie. What will happen to La Compagnie whose profits were used over the past two fiscal years to patch the holes in XL’s budget remains uncertain. The Commercial Court of Bobigny gave XL shareholders a September 28 deadline to present a rescue plan. XL Airways will need €35 million right away to stay afloat.

A week ago, France’s second largest airline, Aigle Azur.

On September 16, Aigle Azur, the second largest French airline by passenger numbers after Air France, entered liquidation proceedings. This came despite two weeks of the usual swirl of rumors that would-be saviors and shareholders were ready to pump millions of euros into the dying airline. On September 2, the airline had asked the Commercial Court of Ivry to grant it bankruptcy protection.

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The exact fate of the company will be known on September 27, but it’s likely that the company’s assets will be sold off in one or more tranches to pay off creditors. Air France-KLM, French Bee, IAG, and EasyJet have all expressed interest in buying parts of the company, with the routes from Paris Orly being particularly sought after. This marks the end for the 73-years old company which has been bleeding red ink without a pause since 2011.

Aigle Azur’s largest shareholder is none other than Chinese conglomerate HNA Group, which bought 48% of the French airline in 2012. HNA has proven unable or unwilling to pump money into the company.

Competition made me do it.

These airlines are but the latest victims of the ultra-competitive European aviation market. As an example of the kind of competition we are talking about here, there are presently 10 daily flights between Paris and New York, with 2 more to become operative later this year. Competitors include everybody from legacy carriers such as United Airlines to the new IAG low-cost brand, LEVEL. Cutthroat competition has driven ticket prices to all-time lows: economy round-trip tickets on the New York-Paris route can be easily found for around $800, while business round-trip tickets can be found for about $1,800. Those willing to deal with one or more stops can pay even lower prices.

This kind of competition is dramatically affecting airline profitability even for airlines such as Ryanair that are out there to make a profit and know how to do it.

In Q2 2019 Ryanair announced a 21% year on year drop on profits. Ryanair’s profits peaked in its fiscal year 2018, at €1.45 billion, after which increased competition pushed that down to €885 million in FY2019. For FY2020 Ryanair hopes to maintain that new and reduced level of profitability, but doesn’t exclude it will drop to €750 million, which would cut in half its 2018 profits.

Norwegian Air Shuttle kicks the can down the road.

Then there’s Norwegian Air Shuttle. According to media reports, the money-losing over-indebted airline recently “strengthened its financial position.” In reality, what the company did was a far bit more complicated: Norwegian negotiated with bondholders what is effectively a debt restructuring deal. In return for extended maturities of those bonds (the bonds coming due in December 2019 will now come due in November 2021; and those coming due in August 2020 will be pushed back to February 2022), bondholders will receive an interest premium and “additional covenants” – and thus the can gets kicked down the road a little further.

And these are still the good times.

In the first half of 2019, passenger traffic throughout Europe grew 4.3% year on year. But we don’t know how much of this growth was due to healthy economic conditions, and how much due to our peculiar economic climate fostering the sale of airline tickets at cost or even at a loss to increase sales volume.

Many of Europe’s busiest airports have reached the limits of their growth: ultra-congested London Heathrow and Amsterdam Schiphol grew by just 1.7% and 1.4% respectively. Growth is mostly happening at smaller airports which, perhaps not coincidentally, are those favored by low-cost airlines, both established and startups.

Last year, Ryanair CEO Michael O’Leary predicted that in the saturated European air travel market, “bankruptcies will become the norm.” As it so often happens, the ruthless Irish aviation guru was absolutely right, regardless of what his many critics say. By MC01, a frequent commenter on WOLF STREET

The curse of pushing volume by selling tickets below cost became an even bigger curse with the peso massacre. Read… The Airline Fiasco in Argentina as Peso Collapses and New Plan Goes Awry


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