SkyEurope Folds...Finally

SkyEurope, an LCC with hubs in Prague and Vienna, filed for bankruptcy late Monday and officially suspended services today (Tuesday). As has been noted here previously, SkyEurope did not compete effectively against larger LCC rivals, including Ryanair, easyJet, and Wizz Air. The move, which strands thousands of passengers all over Europe, will sadly not be the last failure of an airline in Europe in the coming year. Not only are there too many airlines for each nation to have their own state carrier, but so many LCCs have sprang up that the market has been saturated. Whoever thought that starting an LCC in Europe was a good way to make money must have been quite short on business ideas, for European low-cost airlines seem to be the the best way of destroying financial capital known to mankind, second only to subprime mortgages.

As for the future of the European aviation market, pay close attention to whether BA and Iberia are able to merge, as this would allow those carriers to more effectively compete against KLM/Air France and Lufthansa. But an even more crucial development appears to lie in flag carriers, particularly in Central and Eastern Europe. Many of these carriers, particularly ones which offer little or no intercontinental service, such as CSA Czech Airlines, MALEV Hungarian Airlines, LOT Polish Airlines, and Olympic Airways, are extremely vulnerable to low-cost competition. Some are so vulnerable that they have already been taken over, such as Austrian Airlines by Lufthansa. Because these carriers operate few long-haul services, most of their business comes in the form of short-haul travel, which is trending increasingly towards LCCs, particularly in this economy. And carriers such as easyJet are fighting aggressively in the hub airports of these carriers. While these carriers continue to offer amenities to upmarket travelers, the recession is tamping down their travel spending.

What will be interesting is to see whether alliance partners make acquisitions in order to protect their feeds in different regions. For instance, Austrian Airlines is part of Lufthansa's alliance, Star Alliance, and without a takeover by Lufthansa, that carrier risked Austrian failing due to low-cost competition and then not having sufficient feed from the Austrian market to flow to long-haul flights. Lufthansa's buyout not only helps give Austrian the resources it needs to market itself and streamline its operations, but it also preserves this precious feed for long-haul flights.

Aside from buyouts of smaller state carriers, the other major development in the market will simply be the falloff of LCCs. I don't want to sound like a cheerleader for Ryanair or easyJet, but unfortunately, many of Europe's smaller LCCs simply lack the management expertise, the low cost base, and the extensive route networks to succeed. Airlines such as bmiBaby, WindJet, and even Jet2 may be vulnerable to shutting down (or in the case of bmiBaby, having some of its operations absorbed into its parent British Midland). I foresee a market with only a half dozen or so sizable LCCs, Ryanair, easyJet, Air Berlin, Wizz, Norwegian, Transavia, and Clickair/Vueling. There are still some smaller carriers that appear to be thriving, Smartwings comes to mind as one, but it simply does not seem like their business models can work unless they grow extremely rapidly and choose whether to try and compete on price with Ryanair, or aim for higher yields while still minimizing costs (such as easyJet's model). There are still too many carriers with too many seats chasing a dwindling market. Fortunately, a free market has the power to reach equilibrium one way or another. Let us hope that the next airline failures are at least a bit more civil than SkyEurope's was.