Myair Bites the Dust

Myair, an Italian-based low-cost carrier, ceased operations today after Italian authorities revoked its operating certificate, citing ongoing financial difficulties at the company which inhibited the airline from running a smooth operation. The airline, which operated A320 and CRJ900 jets, was suffering under the burden of rapidly falling demand and a stagnation in yields. It is unclear whether any of Europe's other LCCs will replace any of Myair's routes, and in this environment, it's all the less likely.

But I wouldn't post about the demise of a small, relatively unimportant low-cost carrier if it didn't illustrate something else about the industry. Throughout the world, airlines will need to reduce their capacity in order to cope with the repercussions of the financial crisis. But in the United States, this is unlikely to lead to any airline bankruptcies (with one or two possible exceptions, which I will get to in another post). In the U.S., most of the marginal LCCs have either been bought out (Frontier, Midwest), or they have profitable business models (Spirit, Allegiant), and will continue to thrive in their niches. There are simply fewer airlines to consolidate, and the leading LCCs (Southwest, JetBlue, AirTran) would have challenges integrating with another company.

However, in Europe there is a far greater potential for capacity to be taken out through consolidation or through airline failures. And Myair is only one of many rather weak European LCCs which I expect will soon run into trouble. The European LCC industry is rapidly consolidating, and while the largest players are finding their niches, the smaller ones are suffering. Of course, Ryanair is a ruthless competitor, and nobody is going to beat Ryanair on price. Nobody. But Wizz is certainly trying, and has carved out a nice niche for itself in Eastern Europe, especially on routes to countries which Ryanair has yet to commence service to. Easyjet has been successful at courting business travelers, and has cornered leisure traffic from the UK to certain leisure destinations in the Mediterranean. But there are myriad smaller LCCs in trouble, including bmiBaby, WindJet, Blue Air, Spanair, and of course, SkyEurope, which seems to be dying a slow, painful death. Weaker LCCs will continue to be forced to consolidate, because the market can't support their capacity, and they lack the scale which gives Ryanair and easyJet tremendous efficiencies (as well as brand recognition throughout Europe). There are some carriers which are a bit smaller than the leaders, and should continue to survive (a combined Clickair/Vueling, Air Berlin, and Jet2), but many of the industry's smaller players will continue to be marginalized.

Really, there are two more interesting questions that the airline business in Europe raises versus that in the U.S. The first has to do with the role of mid-sized carriers—carriers which are strong in one or two medium-to-large cities, but relatively weak elsewhere. The only airline like that in the U.S. which comes to mind is Alaska, and they've been careful not to overexpand and to focus on their core strengths in the Pacific Northwest. But in Europe, the end of the dominance of national carriers due to the advent of more efficient LCCs, as well as the capacity crunch, begs important questions. Certain mid-size legacy carriers, including Austrian Airlines, CSA Czech Airlines, and LOT Polish Airways are all vulnerable to takeover or liquidation. These carriers lack the cash to survive downturns that the larger carriers have, and they have higher cost structures. Many of these carriers could operate more efficiently if they were part of a European airline conglomerate, such as Lufthansa, Air France/KLM, or British Airways. While the carriers themselves may not be entirely dissolved (but instead run as a subsidiary of the parent), integration with a larger carrier allows capacity to be optimized (read: reduced to sustainable levels). Although such deals may be a blow to national pride, transnational airlines are likely to be more efficient, and are less likely to fly routes for reasons of prestige. This means that passengers from Vienna may have to connect in Frankfurt before heading to Delhi, but it allows airlines to run more efficient operations which facilitate stability, if not necessarily lower fares, due to less competition in a consolidated marketplace.

The second question is one I'd like to examine in more depth later on, so I won't go into it now. But it is this: Why is it, that airlines within airlines, such as Air France/KLM's Transavia, or Lufthansa's Gerrmanwings have been successful even when airlines within airlines in the States have been rather unsuccessful? These are really marginal players in the industry, and at a time of capacity and cost cutting, I wonder how much these carriers are contributing to their parents' bottom lines, and whether they're really more successful than their American counterparts were. I'll offer what answers I can in an upcoming post. Also, I hope to have a post tomorrow about U.S. airlines' financial results and what they may mean for the industry in the States.