The killer factor bringing airlines to their knees

Airlines come and go all the time, that’s nothing new in the world of travel and aviation.

A fickle industry, aeroplanes are expensive assets to own and run with few alternative uses aside from transporting cargo and passengers from A to B.

But in the last 12 months, an unusually high number of airlines have crumbled, and executives have declared massive financial losses at the hands of an unstable economic environment.

In less than a week, two airlines have faced the chopping block. French airline XL Airways has called on Air France to discuss a last-minute deal to avert their collapse. Requiring $56 million in fresh financing, the budget carrier — which operates a small fleet of Airbus A330 aircraft to service the Caribbean, the United States and France’s Reunion Island — declared it had reached “great difficulties” in the past financial year.

But while a rescue mission of the French budget airline remains possible, Thomas Cook failed in their desperate attempts to lock down cash injections from the government or their shareholders before officially going belly up on Monday.

Thomas Cook isn’t the only travel provider to have hit financial trouble in the past 48 hours. Picture: AP Photo/Victor Ruiz.Source:AP

As the biggest repatriation in peacetime history gets underway, the blame game of what went wrong with the cash-strapped travel company is being played.

The 178-year-old business, employing 22,000 globally, felt as if an agreement was possible over the weekend with major stakeholders.

The UK Government was dragged into the collapse after Thomas Cook asked for a state bailout of around $A275 million late last week.

According to the Financial Times, talks between the Government and the company’s stakeholders failed to produce a deal that would keep them out of the red.

Transport secretary Grant Shapps defended the decision not to pump money into the ailing company, telling the BBC a cash injection from the state would only have kept Thomas Cook afloat “for a very short period of time”.

University of Technology Sydney tourism lecturer David Beirman said while a company as iconic as Thomas Cook going under was a “really big shock”, their inexperience in aviation saw them flounder in a competitive market.

“It’s a perishable industry. If you don’t have a full tour group or empty hotel room or not a full aircraft, that’s a licence to lose money,” he told

Tourism expert Dr David Beirman says the sector can be a perishable industry. Picture: Christopher Furlong/Getty Images.Source:Getty Images

“The skill of running airlines is to have sufficient services for your market but not empty seats. As Thomas Cook has less experience than competitors, it was not getting mathematics right.”

But as with most things, there is rarely a single cause for such a big failure. But for the aviation industry, there is one key factor playing havoc with profitability. And it’s a cost Dr Beirman says likely crippled the aviation sector of Thomas Cook.

“Airlines require very specialist skills to be competitive and they are all very subject to cost of fuel,” he said.

“Qantas and British Airways, 50 per cent of costs are on fuel. If you look at a low-cost carrier, 60 per cent of costs are on fuel. The cost of gas is really critical.

“That means all other elements of how they run business have to be pretty lean and mean and also high dependence on all seats are taken.”

While there is rarely a single cause for such a big failure, there is one key factor playing havoc with profitability for global airlines. Picture: Christopher Furlong/Getty Images.Source:Getty Images

One of the most difficult things about running an airline is projecting accurately the costs involved in keeping the business afloat.

Airlines have to deal with fluctuating expenses like fuel, and like most overheads in aviation, the price isn’t fixed, meaning the natural variation in the cost of fuel makes budgeting tricky.

According to Statista, fuel costs constituted an average of 23.5 per cent of an airline’s total expenses over the course of 2018. This was lower than the 32.3 per cent in 2012 but is projected to hit 25 per cent in 2019.

Over the course of 2018, fuel costs spiked right at the peak of the summer season and then dropped again. But now, the cost is on the rise once more, and if it’s not bringing an airline to its knees, it sure is costing it more than it can afford.

Dr Beirman says Qantas has an each-way bet on fuel prices. Picture: Cameron Spencer/Getty Images.Source:Getty Images

Dr Beirman said factoring in the cost of fuel is a skill set airlines like Qantas did well, but others had struggled to manage over time.

“The margin between success and failure in an airline is narrow — if you get the fuel price wrong, or don’t have the popularity, that’s the difference,” he said.

“What big airlines do, like Qantas, is what they call hedging, and that’s where you have an each-way bet on fuel.

“If you make an agreement for a year to hedge fuel at $1 a litre and the market price goes higher than that then you are yippee yayyay, we’ve done really well.

“Qantas has done really well but VA (Virgin Australia) picked the wrong level to hedge at, so when fuel prices went down they were paying a higher price.

“Hedging fuel is really difficult in many respects and it’s educated guess work. You cannot guess when Iran’s proxies will attack oil wells in Saudi Arabia.”

What crippled travel giant Thomas Cook? Picture: Sean Gallup/Getty Images.Source:Getty Images

Last month, Virgin Australia CEO Paul Scurrah announced the airline’s seventh annual loss, accompanied by plans to cut 750 jobs as well as reviewing the carrier’s entire flight network.

Mr Scurrah cited subdued trading conditions in the second half of the financial year combined with fuel and foreign exchange headwinds and increased operational costs as the biggest blows amid a weakening domestic market.

“We have strong revenue growth and we have a problem at the cost level,” he said.

“What I saw coming into Virgin Australia were some strong headwinds related to fuel, where we have spend hundreds of millions of dollars burdened on to the Virgin Australia Group in the last couple of years. It’s important that we do correct the cost base of the company so that we are more resilient when those headwinds are there.”

Virgin Australia CEO Paul Scurrah acknowledged the airline had a problem at the ‘cost’ level. Picture: Britta Campion / The AustralianSource:News Corp Australia

Fuel — along with a weak foreign currency — can be seen as a perfect storm for bringing a travel firm or an airline into a financial nosedive or, in worst-case scenario, to its knees.

The XL Airways’ woes follow similar issues with French airline Aigle Azur, whose unfolding bankruptcy is another pin to fall among smaller European airlines struggling to contend with higher fuel costs and stiff low-cost competition.

When fuel prices began climbing again in 2016, airlines were hit. The political uncertainty has not helped British airlines either — however some critics say some companies may use this as a scapegoat for bad performance, rather than admitting true fault.

“Fuel price is the most significant component of running an airline, and (airlines) must hedge their fuel price,” Dr Beirman said.

“Once they know how much they are paying then they can do all the other marketing things, first class economy seats, all the other things, and they can decide which routes.

“But it’s a tough industry even though demand is growing.”

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