Why Monarch Airlines was grounded. It won’t be the last to fail
The UK’s fifth largest airline went belly up yesterday, stranding thousands of passengers. But Monarch Airlines won’t be the last carrier to cease operations suddenly or, as in the case of Air Berlin and Alitalia, by a slow bleeding process.
Airlines in Europe, Asia, India, and the Middle East may need to go through the same consolidation process that resulted in hefty airline profits in the United States. Although Monarch’s demise resulted from factors other than over-capacity, airlines in Europe suffer from far lower profit margins than those in the U.S. and the reason is simple: too much competition.
Many airlines around the world are profitable by only slim margins if they’re profitable at all. A spike in fuel prices or an adverse geopolitical event could tip the balance (one of the reasons Monarch failed was terrorist incidents in some of their markets). It’s unclear if Gulf carriers Etihad, Qatar, and Emirates are profitable without subsidies, but the region probably doesn’t need three super-connectors (four, if you include Turkish Airlines, which is partly government-owned).
Airlines in Europe are predicted to post a 2.6% profit margin this year, according to IATA ($5.6 billion in profits, which is down from $7.5 billion last year). Middle Eastern carriers, in contrast, will be barely profitable with a 0.5% margin, although some airline execs in the U.S. would question even that paltry number. African carriers will lose money this year and Latin American airlines will be barely break even. North American airlines? Thanks to consolidation, IATA expects an 8.6% profit margin, which, although better than it’s ever been, wouldn’t exactly excite most CEOs. General Motors, hardly a paragon of financial strength, reported a 13.78% profit margin in June.
I predict that the rest of the world will experience the same shakeout that reduced the number of U.S. carriers to three major network airlines, plus Southwest, in addition to niche players Alaska, Jetblue, Spirit and Frontier, and frankly I wouldn’t be surprised to see further consolidation even in the U.S. Spirit and Frontier are the most likely candidates during the next downturn.