Why it’s good for the industry if airlines go bankrupt

The recent spate of airline mergers – or merger talks – begs the question: Is it better for the industry if two airlines merge or one of them goes bankrupt. Verdict: It’s better if an airline goes bankrupt.

Here’re three reasons why bankruptcies are good for the industry overall.

  1. Increases industry revenues. Many airlines are not making money because fares are too low, compared to costs. More bankruptcies mean less price competition for the remaining airlines. They can then raise fares with less fear of undercutting. This would help them cover costs, and increase profits for the industry overall. Cathay Pacific was able to optimize flight times between Hong Kong and Vancouver after Oasis HongKong went bust.By contrast, in mergers, the new combination of airlines takes long to rationalize routes, and when they do, they still charge low rates since fares never really increased the way they could have, due to sudden disappearance of competition from a route.
  2. Dramatically lower costs. When airlines close for business, they lay off a large number of people. These people increase the labor supply in the market, and are hired by other airlines at lower wages. This reduces the overall wage component of the costs. When airlines go bust, they also get rid of their planes at very low prices. They are sold to other airlines, which can then put them on their under-serviced routes. Again, reducing the cost of the equipment. AirAsia is a great example of an airline, which inherited two planes with just a $0.50 down payment, and  was able to tap on the abundance of cheap labor, right after 9/11.
    In a merger, however, lower costs through economies of scale can take very long to achieve, if at all. This is because the newly merged airline often finds it difficult to manage staff homogeneity. This has been a thorn in the US Airways and American West merger, as well as Air India and Indian Airlines merger. Both the airlines’ staff still maintain different seniority levels, different pay scales and often fly their original routes only, resulting in hardly any cost reductions through rationalization.
  3. Survival of the fittest improves service. When fewer airlines operate a route, and make more money on that route, service inevitably improves. This is because these profits can be pumped into improving customer service, on the ground and in the air. Once a couple of airlines have gone bankrupt, the surviving ones generally take the “honor” of being the fittest, and the service often notches up a bit. Not only that, remaining carriers often come to the rescue of the stranded passengers of the bankrupted airlines, as they see a ripe opportunity for acquiring new customers.

At the end of the day, if the industry overall benefits from the perishing of some airlines, isn’t that better than going through the cumbersome merger process which is fraught with the risk of failure anyway?

Ponder that!

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Links:

  1. Cathay Pacific reschedules Vancouver flights
  2. US Airways and American West pilots feuding
  3. AirAsia starting up by with only $0.50 downpayment
Shashank Nigam

Shashank Nigam

Shashank Nigam is a globally sought-after consultant, speaker and thought leader on airline branding and customer engagement strategy. He is the Founder and CEO of SimpliFlying, one of the world’s largest aviation marketing firms working with over 85 aviation clients in the last ten years. Nigam is also the youngest winner of the Global Brand Leadership Award and has addressed senior executives globally, from Chile to China. Nigam’s impassioned and honest perspectives on airline marketing have found their way to over 100 leading media outlets, including the BBC, CNBC, Reuters and Bloomberg, and into leading publications such as The Wall Street Journal and the New York Times. He writes a dedicated monthly column in Flight’s Airline Business, challenging the typical assumptions about airline marketing. His new book on airline marketing, SOAR, is an Amazon bestseller that’s shaking up the industry and inspiring other industries to learn from the best airlines. Born in India, raised in Singapore, he now lives with his wife and two young daughters in Toronto.
Shashank Nigam
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Comments
  • Shitij
    Reply

    Interesting Concept

    Any specific names in mind? 😀

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