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Protecting your business in the face of rising airline insolvencies

Posted April 9, 2019

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Air travel has seen a huge shift over the past decade; from the days of exclusive luxury airline travel with Concorde, to the emergence of mass market low-cost airlines such as easyJet and Ryanair. Flying is often the quickest and, in some cases, the cheapest form of travel. So much so that a total of 4.3 billion passengers flew in 2018, indicating a 6.1% increase from 2017 - a significant difference in just a year and certainly from the early days of aviation when flying was reserved for the wealthy.

Drivers for reduced air fares include the rise of Low-Cost Carriers (LCCs) as they pass on cost savings directly to passengers; greater levels of competition between airlines; as well as improved cost control techniques from better technology and better use of data.

However, while the increased affordability of air travel is great news for eager travelers, airlines continue to face mounting pressures. As a result, we’ve seen the steady flow of airlines going bust, with failures like Germania and Cobalt this year leaving many travelers stranded, and travel intermediaries out of pocket. And as recently as a fortnight ago, Iceland’s Wow Air, left thousands of passengers stranded after unexpectedly ceasing operations.

In fact, according to our latest assessment, over the last 15 years (between 2003 and 2018) an average of 52 airlines insolvencies have occurred each year. The failure with the biggest impact in recent years was Monarch airlines in late 2017, with almost 2,000 staff let go and the travel plans of 860,000 passengers disrupted.

So, why is this happening?

Increased competition:

To stay ahead of the game, airlines have added more capacity in recent times, including when their operating costs were lower in 2018, but the industry may now be seeing excess capacity, particularly in Europe. In addition, the growing presence of budget carriers is creating an environment where weaker businesses are under heavy pressure and unable to compete.

Volatile fuel costs:

An uptick in fuel costs tends to induce financial distress, particularly for airlines that are not well placed to compete, for example, because of a lack of ability to raise fares or lower other costs. In fact, the continuing rise in the cost of fuel has been a factor for the failure of many airlines, including Primera Air and Monarch, and in such an intensely competitive market, other airlines are expected to follow suit.

Other common triggers:

There are many factors out of airlines’ control that negatively impact their financial growth. These include political uncertainty, the threat of war deterring tourists from traveling, and natural disasters such as earthquakes or hurricanes directly impacting the airport and locales. Each of these can sap demand for tickets and may force an airline into failure or into refocusing on new sources and destinations, potentially with more fierce competitors.

However, there is light at the end of the tunnel. Travel agents can protect themselves and their end travelers from airline failures by using virtual cards to facilitate their payments to suppliers. With sophisticated chargeback features, and backed by a Mastercard guarantee, WEX’s Virtual Account Numbers (VANs) protect against supplier default, such as prepaid but incomplete travel (if this is a fault of the airline). In fact, WEX has recovered almost USD4 million for our customers following the airline bankruptcies of Germania and Cobalt airline over the last six months – benefitting a total of 14,700 end travelers.

But the benefits of WEX’s VANs don’t stop there. They can positively impact all parties affected by an airline failure, from an end traveller more likely to be able to recover funds from their travel agency, to a government (taxpayers) incurring less of the direct and indirect costs. To find out more, read our guide on airline failures.

Learn more about how WEX travel payment solutions can be tailored to your business, so you can accelerate and streamline operations while creating lasting growth and success for your organization.

Resources:
BBC
ICAO International
UK Government Services
The Guardian
This Is Money Magazine
Telegraph Magazine

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