Yahoo Finance After Cobalt, will any more European airlines go bust?
Cobalt has become the latest European budget airline to go bust, following Danish carrier Primera Air, which ceased trading earlier this month. While the Cypriot airline had only two years of flying behind it, after stepping into the breach left by the failure of the national carrier Cyprus Airways, Primera had flown for 14 years. Both carried a fraction of the passengers of British holiday airline Monarch, which collapsed last year.
Are other airlines on the brink?
The big players in Europe have long warned that smaller airlines would go bust, arguing that consolidation – them snapping up the minnows – was the way forward for the industry. British Airways parent IAG eyed Norwegian, which has defied predictions from a year ago and kept aloft, but still sustained losses. Perennial struggler Flybe issued a profits warning this week, sending its share price tumbling.
What are the problems?
The big one is rising fuel costs. The unexpected bonus of plunging oil prices saw airlines’ jet fuel bills drop dramatically from $120-$140 (£92-£107) a barrel for much of the decade to a low of $40 in early 2016. That led almost all airlines to finally make a profit. But now the price is back at nearly $100.
Some airlines loosened the purse strings and committed to aircraft purchases or leases that the industry could ill afford overall: analysts talk of overcapacity, which can be good news for passengers in the short term with lower fares to fill seats, but may not prove sustainable.
What else?
For some, Brexit – or at least the tumbling pound since the referendum. Fuel and aircraft are bought in dollars, but a large proportion of the revenue for IAG, Ryanair and others is in sterling.
Poorer sterling exchange rates also deter Britons from travelling, and the UK punches above its population weight for air travel. Cobalt was heavily reliant on the UK routes, including Heathrow and Gatwick - almost 30% of air traffic to Cyprus came from the UK last year.
The uncertainty surrounding Brexit continues to affect confidence: Wizz Air has become the second scheduled airline, after Ryanair, to put a clause in its conditions disclaiming liability for flights grounded due to Brexit after 29 March next year. Whether Brexit-related or not, several airlines have identified falling consumer demand and forecast overall revenues to decline.
Are bigger airlines immune to the problems?
Share prices are slumping across the sector, at almost three times the rate of the overall FTSE fall in the last month. So no, probably not.
