Why so many airlines go bankrupt?
A quick, bullet-point exploration of why so many airlines lose money and why is it difficult to run an airline business.
Increasing flights to existing destinations or adding new destinations means more aeroplanes, more pilots, more fuel, more flight attendants, more maintenance hours, etc.
This quick build-up of costs for increasing revenue makes growing an airline very expensive.
And while the costs are variable on revenue’s way up, most of these variable costs quickly become fixed and independent of the revenue.
For example, let’s say you run three Airbus A320 aircraft, flying to three destinations and back.
The flights are usually full, and you have to say “no seats available” to many people.
So you buy two more aircraft, each costing you around $107 million.
And then, there is a decline in demand for any of the following reasons:
Economic recession,
Seasonality,
Bad weather,
Competitor offers,
Safety concerns (recent terrorist attacks, accidents or a pandemic), etc.
Except for the fuel & food costs and some passenger-related government taxes, almost all the remaining costs are now fixed for you, i.e., aircraft, salaries, maintenance costs, airport fees, running expenses at your corporate office, etc.
Equally bad to (and, in some cases, worse than) not flying an aircraft is flying it with empty seats, and a lot of time, that is what airlines have to do.
For instance, the worldwide load factor (% of seats occupied) is around 80%.
It means 36 seats out of the 180 in your A320s are unoccupied, and these seats are just a cost to you, with no revenue.
Every occupied seat on a domestic flight costs about $70 to an airline.
Assuming that a vacant seat costs 20% less (i.e. $56) because of passenger-related taxes/expenses, 36 empty seats mean a loss of $2,016 ($56 X 36) per domestic flight.
Assuming all 5 of your A320s fly just once every day of the month at an 80% load factor, you will incur a $302,400 monthly loss.
In an ideal scenario, you can recover these losses by increasing the ticket price for the remaining seats.
But that is only possible sometimes because you get to know your actual occupancy rates closer to the take-off.
And if you wanted to work with an 80% load factor and charge premium prices for these 144 seats (180 minus 36), the competitors wouldn’t let you because they aim to improve their load factor.
In a category with weak brand loyalties, negligible competitive advantages and zero switching costs, this means that even if one airline – whether based on low cost or acting irrationally – decides to cut fares, competitors have little choice but to follow.
On top of it, the flight routes have saturated, i.e., there are already many players in any given sector, so there isn’t much growth potential left in the current model.
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