The Madness of the Airline Industry

Or Welcome to the Dark Side of Aviation

32 airlines have already ceased operations in 2019 alone. The situation in 2018 was even more dramatic, with around 87 airlines catapulting out of the market, according the Swiss aviation intelligence provider CH-Aviation. Does this mean that this industry is terminally ill? No! But it is severely wounded. At least across the German-speaking world.

Periodic cycles within the global economy are normal and are therefore also common in aviation and the associated airline industry. At first glance, the staggering number of groundings is enormous. Looking back over the last ten years, 1,234 airlines have vanished from the market. In contrast, however, the number of airline start-ups stands at 1,984. So there is certainly net growth. This coincides with the number of passengers carried worldwide growing from 2.2 billion (2007) to 4.2 billion in 2018. So far, so good!

No chance against the dominant airlines

If we now look at the shark tank that is the European market - and at the current German-speaking market - we notice that the airline industry system is undergoing a significant shift. In concrete terms: a massive shift in market dominance has manifested itself in recent years. Airlines which, on the one hand, were independent and increasingly active in the regional flight sector have been almost completely driven out of the market. These included well-known niche players such as DBA, Cirrus, Augsburg Airways, OLT, Darwin, Skywork and Intersky. None of them stood a chance against the major dominant airlines in this industry.

Recently, however, even airlines of a certain size in the German-speaking world have suffered a crash landing, in the truest sense of the word. Quite a surprise for many unsuspecting passengers. Among them were Air Berlin and most recently Germania. Although it has to be said that these groundings were not necessarily due to the exact same reasons as in the case of the regional airlines. It should be pointed out here that some problems were homemade and after many years of flying against the current – or even stalling completely – enough was enough. As is so often the case...

This case is truly dramatic

The latest in these series of events is intriguing to see. Suddenly there are only a few players left on the market in our region. They all have different names, such as Lufthansa, Swiss, Austrian Airlines, Eurowings and Edelweiss. But what do all these airlines have in common? The same parent company! Namely the Lufthansa Group. These cover all three market segments, i.e. traditional, classic flying with Lufthansa, Austrian and Swiss, the low-cost sector with Eurowings and holiday flights with Edelweiss. There is virtually no getting past this sheer market dominance when flying within these countries.

But wait, one name is still missing: Condor! This case can certainly be described as dramatic. This is because Condor is one of the few exceptions among airlines that is actually making a profit in the double-digit millions (2018). However, it is well known that children cannot choose their parents. Condor was forcibly adopted a few years ago and has since then belonged to the British travel group Thomas Cook. The future of Condor now hangs in the balance due to the group's financial difficulties. And through no fault of its own. This can happen at any time, even to other market participants. On the other hand, the possibility of opportunities is relatively one-sided.

Business is a unique risk

That the German government is providing stop-gap funding of over €380 million is a most welcome development. This is certainly a more sensible investment - that is, loan - than was the case with Air Berlin, which had been operating at a loss for years. The search for a new owner of Condor presents another challenge. But that's exactly the spanner in the works, or rather, the spanner in the aircraft engine. Who should be the buyer? Lufthansa, of course - after all, there is no one else around. But please only when the price has crashed to such an extent that the joy of survival is greater than the rage and grief over the selling-off of the "former" Condor. Insane and bleak. Or in other words: Welcome to the dark side of aviation!

No. I do not envy the top managers of the European airlines (anymore), even if at my very core I was an airliner enthusiast through and through and will remain so forever. The life of an airliner is exciting, multifaceted and up to the minute. Changes happen and their effects are immediately noticeable. The media is always interested both in good times and bad. Yes, this business is sexy! But the business poses a unique risk and shares similarities with gambling on the stock market. But all these top executives continue to have my respect. They are all doing a great job away from the glamorous side of the aviation industry to achieve at the very least - in a best case scenario - a 2 to 3 percent profit margin at the end of a few years.

The passenger sees and notices no sign of all this

Yes, the aviation sector's international supplier industry is just too slow, sedate or let's just say, terribly unerotic, compared to the life of an airliner. Pure B2B customers, little charm, hard facts and an enormous amount of effort to deliver corresponding components to airlines and aircraft manufacturers at the end of the day, which will be installed in a large aircraft somewhere, in locations and places where no passenger in their wildest dreams will ever think necessary in order for a flight from A to B to be safely carried out.

All components have to withstand static and dynamic tests of up to 16 G. Fire tests are also necessary and a great deal of documentation is required. All this costs money and is many times more expensive than in the automotive industry, for example. The passenger sees and notices no sign of all this. And indeed, these components always cost the same, regardless of whether a passenger pays 19 or 999 euros for their ticket.

At the end of the food chain

It is not the system within the airline industry that is sick. It is only the signs of the times that have changed. To be able to survive today as an airline is much more important than cheap prices. Clever chess moves, dominance through sheer size and tricks are in demand, but also the price-focused customer base, which relentlessly plays along with the game just to find itself sitting in front of closed aircraft doors in surprise at the end of it all when grounding occurs yet again.

In the meantime I can sleep peacefully again at night with a clear conscience, as an international aviation supplier, knowing that I am on the right side of aviation in every respect. Not alone, by the way - but together with the big international airports, which are all, together with the aircraft leasing companies, healthy market participants in this industry's profit margin ranking. That's almost sadly tragic. The industry mainly manufactures in accordance with both the aviation industry's international and regulatory safety requirements. Price dumping is therefore ruled out. The airlines, on the other hand, are quite literally at the end of the food chain and have to regulate prices while finding themselves left out in the cold.

An afterthought

To conclude, I sincerely ask for your forgiveness, but I just can't stop myself from becoming heretical after all: it's not just a request, it's a downright plea to the top airline executives. You are urgently needed on the right side! In the supplier industry. You have exactly the right expertise that is desperately needed. Follow me!

About the Author

Roger Hohl (35) has headed the international aerospace supplier ACM Aerospace (Aircraft Cabin Modification) since 2016, with annual turnover in the double-digit millions and around 200 employees spread over eight locations (Memmingen, Hamburg, Toulouse, Broughton, Dubai, Bangalore, St. Nazaire and Addis Ababa). He previously spent 13 years with Intersky, serving as CMO, CCO and most recently as the world's youngest airline CEO. The regional airline discontinued operations in November 2015. Hohl, a Swiss native, lives on Lake Constance.