The airline industry this year has been facing more lows than highs. To blame are not only the numerous terrorist attacks, that have tarnished the image of some of the world’s major traveling destinations, but also political instability and strikes.
Lufthansa, for instance, has only recently managed to find a deal to end the pilot’s union strike that caused 4,450 flights to be cancelled cancelled – involving more than 500.000 passengers. Cokpit, the pilot’s union, demanded both higher in wages (in accordance with the 2% inflation over the past 3 years) and more certain economic prospects.Yet, pilots should have little to protest considering the average 180.000 euro salary they earn (even compared to the 85.000 euro salary of a Ryanair pilot). Thus, Lufthansa, while continuing to be one of the largest commercial airline companies and earning a 1.5 billion euro profit this year, it has had to face considerable public outcry and deal withnumerous internal difficulties.
But there are other companies whose prospects are even less promising. Alitalia, the Italian national company, despite the low fuel costs, will close this year with a predicted 400 million loss, double than in 2015. That’s a huge problem for the company acquired in 2014 from Etihad Airways, the second Arabian company after Emirates. The new management tried to start over, introducing new equipment and more profitable long-range flights. Yet, a 500.000 daily loss shows that such efforts are not sufficient. According to latest news, there is the intention to restructure the huge debt, especially with the main creditors, Unicredit and Intesa-San Paolo. However, according to some estimates, the plan will likely reduce 2.000 more in personell to cover related expenses. In addition, the likely increase of oil prices, in the next years, will not help the company return in positive territory.
There aren’t only economics issues to be considered in air company management, but also political problems. An example is the current situation of Turkish Airlines. This year, Turkey’s internal political situation along with the several terrorist attacks has led tourism to fall by a 40% margin in one year. In the period between January and September, Turkish Airlines has lost 463 million dollars, when, last year, in the same period, it gained almost a billion. This forced the company to cut orders: 34 planes, ordered for 2018, will be reduced to 10. In addition, around 30 planes, above all airbus A-330 (long-range planes) have been temporary dismissed. Perhaps greater political stability will allow Turkish Airlines to recover.
Not all problems affected traditional vectors. This year, also Easyjet, the second low-cost European company, is suffering from both an economic and political situation. The decision of Great Britain to leave European Union’s Single Market area could strongly limit the British company’s returns. As can already be seen by Easyjet’s data predictions, the depreciation of the pound will increase costs to around 90 million.
However, certain low cost companies seem to be coping better in this current moment. For Ryanair, profits have risen in the first 6 months by 8%, transporting 64.8 million passengers. Indeed, the CEO of company, Micheal O’Leary, has gone as far as proposing to give out free tickets. This could be seen as a misjudgment, but the marketing strategy underlying this choice is not to be overlooked. According to O’Leary, revenues would come from airport services such as restaurants and shops. The rationale is that more tickets sold would mean a greater flow of people in airports and a better turnover for airport services. That could be a very effective strategy in the following years, taking into account that the company is likely to go over 200 million passengers transported in 2024.
By 2024 the market will be radically changed. The current trend is that commercial airlines risk to be in trouble. They will be always more dependent from long-range flights. The key to survive is innovation and, above all, innovation related to services. A traditional company needs to offer a more diverse customer experience, much like Emirates has already done, in order to compete with low-cost rivals. Today, the service offered by economy class of a traditional company is not much different from an economy class of a low-cost company, with the difference of a general lower price. So, it’s up to management understanding customer needs and adapt to a rapidly changing reality.
By, Eugenio Baldo.
