Establishing an airline amidst crisis: the good, bad and ugly
Within a couple of weeks of the abrupt stop in the aviation industry, there was no secret that the industry expected airlines, particularly those that struggled prior to the crisis, to go bust. Despite the dried-out stream of revenues, that was not the case . Governments around the world acted fairly quickly and handed out state aid and state-guaranteed loans in order to ensure the liquidity of airlines based in the country and, in turn, connectivity from and to the country. Even during the pandemic, connectivity was crucial, as air travel companies began transferring vital medical equipment, bringing back stranded citizens and ensuring the smooth flow of cargo as online shopping started to boom. Furthermore, as borders around the world are slowly opening up, business needs to happen and, once again, while limited in numbers, connectivity becomes crucial.
But not every country has an airline to support or a carrier that would offer the capacity to satisfy the demand. And crises might be the perfect opportunity to create something out of nothing, especially when long-established competitors have grounded their fleets and a newcomer would almost have the exact same starting point compared to an airline running in the business for a long time.
Virtual airline: the good
One government has decided to do just that. Lithuanian Minister of Transport Jaroslav Narkevič stated that Lithuania aims to have its own carrier, as nobody can assure that the same level of connectivity would be available in and out of the country as the coronavirus pandemic blows over. The process of obtaining an Air Operators Certificate (AOC) can be a lengthy one and requires a lot of starting capital, thus the window of opportunity might close. Thus, Narkevič indicated that a virtual airline would allow flights to start much sooner, in addition to the fact that the initial round of funds would be much lower. The virtual airline would use the services of an Aircraft, Crew, Maintenance and Insurance (ACMI) company, which would also allow the newly-established flag carrier to be much more flexible in size, in terms of fleet and route network.
The Minister noted that the goal to establish the airline is to be around late-2020 or early-2021.
And the window opportunity is even wider due to the fact that ACMI operators currently have little business. After all, at its simplest form, such organizations as Hi Fly or Avion Express offer additional capacity to other companies, whether it would be airlines or tour operators, to carry passengers when the companies themselves are overflowed with traffic, particularly during the peak summer season. In emergency situations, ACMI carriers, with their flexibility, could also throw out a helping hand.
Nevertheless, little business means more leverage in negotiating a price on the side of the proposed virtual flag carrier. This could prove to be vital, especially during a downturn of traffic, as operating costs would be limited when yields are also limited.
The general consensus in the industry is that some sense of normality and 2019-levels of traffic would rebound by 2023 or, in the worst-case scenario, 2024, long-established airlines began downsizing their fleets and cutting unprofitable or barely profitable routes to save costs. This could theoretically allow for easier acquisition of an intangible asset that was in high demand, but low supply prior to the pandemic: airport slots, especially in European airports like London’s Heathrow (LHR) or Gatwick (LGW), or France’s Paris-Charles De Gaulle Airport (CDG), or the main airport at the European financial hub, Frankfurt Airport (FRA).
Thus, the good side of establishing an airline during a pandemic, especially a virtual airline, could mean that unlike under normal circumstances, the opportunity to be one step ahead of the competition is definitely there. After all, some airlines have already announced significant expansion plans despite the current markets – Wizz Air, for example, is opening up seven new bases across Europe, as the strong liquidity position allowed the airline to expand despite current headwinds.
And with no national flag carrier to compete with and including the fact that airlines that are based elsewhere might not return to a country’s capital, a virtual carrier could be a great solution. With the right branding, the company could invoke patriotic feelings from consumers making them more inclined to choose the new airline, rather than any of its competitors.
Current market: the bad
The current market could also be detrimental to the carrier‘s development, à la a double-edged sword. As borders slowly reopen, airlines have begun increasing their capacity. Tour operators are also looking at slowly restarting their operations. For example, on June 16, 2020, TUI announced partially restarting its operations, including “two fully booked flights from Germany to Majorca, Spain.”
“Since the suspension of our program in mid-March, online enquiries have indicated that holidays remain important to our customers and we have seen our customers committing for future seasons,” indicated the company’s press release.
At the same time, the window of opportunity might also be closing. While the operational part of flying might be covered with a virtual carrier, properly branding the company, establishing its logo to be known to consumers and getting it onto various booking systems is no walk in the park. Narkevič used the example of Nordica, an Estonia-based virtual carrier, established by the country’s government in 2015 after its main flag carrier, Estonian Air, collapsed. A year after establishment, Nordica entered into a commercial agreement with LOT Polish Airlines to establish a “joint commercial platform and ticket sales system, as well as the sharing of airline codes.”
But Nordica, under normal market circumstances, was pushed out of its own home market. On October 26, 2019, the airline transferred all commercial responsibility to LOT and started solely focusing on operating flights. The increasing presence of low-cost carriers and airBaltic, the de facto flag carrier of the three Baltic States, as well as a relatively small market for air travel, made Nordica redundant.
“Strong competition and oversupply of seats on Tallinn routes do not allow us to operate profitably, today,” stated a board member of the Estonian company, Kristi Ojakäär.
airBaltic has already restarted some form of flights from Vilnius, Lithuania, including destinations to where large diasporas of Lithuanians live, including Dublin, Ireland, Oslo, Norway and London.
Competitiveness and ego: the ugly
Competition in this part of the world can be a cutthroat, as evident by the flyLAL bankruptcy in 2009. While the district court of Vilnius deemed that airBaltic had to pay the Lithuanian airline a $17.9 million (€16 million) compensational fee due to unfair competition practices in January 2016, the decision came seven years too late. The airline was already far and gone. However, that does point out how aggressive competition can be in the market.
airBaltic has openly stated that it aims to expand its route network from all three Baltic State capitals. “Business plan Destination 2025 was originally presented in May 2018 and relies on the expansion of routes from all three Baltic countries – Latvia, Estonia and Lithuania, covering the main European hubs,” stated an announcement about the company’s new plan Destination 2025 CLEAN.
If the Latvia-based airline could only partially close the window, low-cost carriers might shut it completely. European airlines, big or small, have struggled to compete against the cheap airlines. The Lithuanian market is no exception: in 2019, Ryanair and Wizz Air combined for a 55% market share, with Norwegian holding an additional 3%. Considering the bullish behavior of both low-cost carriers, there is almost no doubt that they would react strongly to a new competitor in a 6.5 million passenger market. As mentioned previously, Wizz Air already began expanding its bases around Europe. Ryanair’s executive Michael O’Leary already anticipates a price war in Europe to pump up the demand for air travel. Immediately, a question arises: can a new airline compete with a formidable and aggressive competitor in airBaltic, and two very aggressive and price-conscious airlines, despite its patriotic appeal? Can customers resist the $11 (€10) ticket-appeal and go for a potentially more expensive national flag carrier?
Even if the new virtual airline can negotiate great terms from ACMI operators, the question remains if they are willing to enter into long-term agreements, considering that the industry has tended to recover, no matter the challenges that it had to face? In the short-term, when additional capacity is not needed, they do not have the leverage. Yet as air travel picks up in volume, the balance in negotiations changes. If aircraft rentals go up, operational costs go up and then the question becomes what advantage the virtual carrier has against low-cost carriers or the hybrid airline airBaltic?
Add the spiciest flavor to the mix – politics. There is no secret that politics is a game of egos. If a new majority government is formed in the next round of elections and if the new airline is failing to deliver a profit, it can be immediately used as a scapegoat and an example of how the previous government wasted tax-payers’ money on something that was not useful, despite the very best intentions behind the new virtual carrier.
At the end of the day, predicting the fate of the yet-to-be-established airline is difficult, especially in the context of the current unprecedented crisis. While the aviation industry tends to recover, every crisis leaves a different imprint in the book that depicts aviation’s history. But no crisis was like this one, where passenger confidence, purchasing power and government-imposed travel restrictions became the three Infinity Stones. There are questions that definitely need answers, including from other European markets. If Austria and Switzerland started imposing anti-dumping policies, could that start a domino effect across the European Union under which low-cost carriers are crushed by the dominos, possibly throwing a lifeline for hybrid and full-service carriers?