The Return of Airline Analysts: Air Berlin, Monarch and Ryanair

It’s been a while since I last updated but three recent events in the industry inspired me to come back with some analysis and insight.

Three large European network carriers have hit crises: Air Berlin, Monarch and Ryanair. Each of the crises are different in both cause and impact on passengers. The stakes are different too. Lets take each one in isolation and then try and draw some common features.

Air Berlin

The carrier with strongholds at Berlin Tegel and Vienna Airports benefitted from a 29 percent ownership of Abu Dhabi’s airline Eithad Airways. Since acquiring this stake in 2011, Etihad wasted an astonishing US$2 billion on Air Berlin yielding almost US$3 billion in losses in 6 years. In fact, Air Berlin displayed the classic features of a permanently failing organization. As illustration of this, perhaps the most ridiculous statement to explain the failure of Air Berlin was a statement by its last CEO, Thomas Winkelmann that the failure to complete Berlin’s Brandenberg Airport in time!

Anyone who closely follows the industry knows that the delay in completing construction of Brandenburg Airport cannot explain Air Berlin’s failure. The inevitable explanation resides in three areas. First, its cost structures were uncompetitive relative to the large LCC airlines such as Ryanair and Easyjet. Air Berlin won’t be the first and last European carrier to suffer from that problem. Second, their hard product was inferior to their competitors  and incoherent with its principle alliance partner – while code sharing with arguably one of the most high-end carriers, Etihad, in premium segments, Air Berlin only introduced business class in its short haul fleet a few months before its insolvency. On its long haul flights, Air Berlin offered a pretty standard business class product which remained inferior to Etihad’s both in terms of hard product (food, seating) and soft product (service protocols etc). But perhaps the most important explanation for Air Berlin’s travails was that senior management had the luxury of soft budget constraints due its relationship with Etihad. Failure after failure was met with further cross-subsidy from Abu Dhabi rather than hardnosed analysis of the fundamentally poor management of the company.

Deutsche Lufthansa AG and EasyJet Plc have been identified as the likely successful inheritors of the main assets of Air Berlin. This gives both Lufthansa Group and Easyjet the possibility to increase their market power in the lucrative German passenger aviation market and at the same time keep Ryanair at bay.

The creditors’ committee plan to negotiate with the two carriers until October 12. Discussions with bidders interested in other assets will continue in parallel with neither Lufthansa Group or Easyjet interested in buying the whole airline but rather cherry-picking the few assets that are worth acquiring.

Lufthansa has laid claim to Air Berlin’s partner carrier based out of Vienna  FlyNiki, in addition to an additional 38 aircraft it already wet leases from the carrier. That would provide Germany’s largest passenger airline 73 single-aisle aircraft amounting to about half of Air Berlin’s fleet. This is a naked monopolistic move from Lufthansa Group and unsurprisingly Ryanair has expressed concern about Lufthansa’s attempts to cherry-pick Air Berlin’s assets as well as the German government’s temporary loan offered earlier in 2017. Ryanair has filed a formal complaint to the European Commission and German competition regulator stating that the German government and Lufthansa of violating anti-trust laws. It’s hard to argue against Ryanair – especially given Lufthansa Group’s past acquisition behavior – Swiss International Airlines, Austrian Airlines and Brussels Airlines – which demonstrates its proclivity for monopolistic behavior and the German government’s willingness to line up the political ducks in its favor. There is little doubt that Lufthansa Group dominates the Central European airspace with hubs at Brussels, Frankfurt, Munich, Vienna and Zurich airports – vital in its attempts to foreclose entry to Ryanair within Europe and against the Gulf + 1 carriers (Emirates, Etihad, Qatar and Turkish Airlines) on long-haul to Asia and Africa.

In a forthcoming blog post, I will deep dive into Lufthansa Group’s passenger airline strategy and the emergence of its newest brand Eurowings.

Monarch Airlines

The revelation that the UK’s longest-surviving airline brand had become insolvent meant thousands of passengers arrived at airports on Monday morning to discover that their holiday plans were destroyed given Monarch’s primary role as a package tour airline.

The collapse of Monarch means that about 2,100 employees face redundancy with countless more lost at its ground service providers who have lost a major client. Some have hoped many redundant staff may be employed by other airlines that may be interested in acquiring parts of Monarch’s failed business. The nature of Monarch’s collapse was epitomized by the revelation that its pilots were billed for calling a phone number to find out that they had been fired! Britain’s largest ever passenger airline insolvency has led to the biggest ever peacetime ‘rescue’ of UK residents from abroad as it had to repatriate 110,000 holidaymakers stranded overseas after the collapse of Monarch Airlines.

Monarch received a cash injection from private equity firm Greybull Capital in September 2016. Shortly after the investment Monarch announced losses of GBP291 million in the year to October 2016. So what caused Monarch’s failure? Two reasons can be identified.

First, a combination of a depreciating pound since the Brexit referendum in June 2016, coupled with uncertainty in key holiday destinations related to the risk of terrorist attacks in the Middle East and Europe negatively impacted the carrier. Weaker sterling has been a factor for all UK based airlines  — the slump in the pound has cost easyJet £90 million. The falling value of GBP also lowered the number of people able to afford a holiday while increasing fuel costs paid for in US$.

 

Second, senior management’s growth strategy – Monarch ranked 5th in the UK – was to focus on ramping up its LCC footprint. This immediately placed it in the crosshairs of fierce competition from larger rivals (EasyJet and Ryanair). It’s financial position couldn’t really support this growth ambition. While Monarch carried 14 percent more passengers in 2016, its topline performance was reflected in GBP100 million less revenue for Monarch. Without long pockets, this growth could not be supported. Monarch is believed to owe Greybull Capital as much as GBP150 million, with the firm set to lose a total of £250 million, which it considers to be total write-off.

Ryanair

A seemingly innocuous decision taken by Ryanair to persuade its pilots to use up fewer vacation days the peak travel season has unleashed a crisis that few, including myself, had anticipated. The consequence of making pilots work over the summer is that now as the autumn period kicks off, Ryanair doesn’t have enough pilots that required Ryanair to cancel around 2,100 flights that started on September 16th and continuing through October.

A  technical change in the way annual leave was calibrated is believed to the main cause: Ryanair usually counted holidays in the year from April. But in 2016, Ryanair shifted to a January to January calculation. This transition necessitated its employees to use all their annual between April and December 2017. The consequence is that the airline will probably have to scrap more than 50 flights every day until the end of October leaving hundreds of thousands of passengers stranded in some of their core markets. Based on its EU obligations, Ryanair has tried to find customers alternative flights and by providing them with compensation as required by EU rules. Ryanair is likely to incur expenses of €20m and will lose at least €5m as a consequence.

The UK’S Civil Aviation Authority (CAA) has begun enforcement against Ryanair over its decision to cancel thousands of flights. Ryanair announced it will fly fewer aircraft during the winter 2017 period with as many as 400,000 passengers finding their journey’s cancelled. The CAA says that the company has been “persistently misleading passengers”. This situation is without question a public relations and brand disaster for Ryanair. Europe’s largest passenger airline now has to face the anger of millions of travellers because of their decision and Michael O’Leary, Ryanair’s CEO, stated that this was a “mess of our own making”.

Does this crisis spell longer term problems for Ryanair or is this a temporary blip as Ryanair is claiming? My sense is that Ryanair will recover since its core strategy of extending its LCC footprint whilst progressively upgrading its soft product mean that as long as the traditional carriers continue to lower the quality of their soft and hard product but struggle to compete with higher costs than Ryanair, there is little to threaten the Irish carrier. There are some rumors that other LCCs have poached pilots from Ryanair but its focused strategy of short- to medium- haul flights within Europe using a single type of aircraft has proven to a cost-reducing winner for the airline.

Stay tuned for future updates!

 

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