More failures likely for smaller low-cost carriers

September 08, 2009 05:54:57 PM

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Failed Slovakian low-cost carrier SkyEurope could be just the first casualty among the smaller airlines finding it difficult to survive one of the worst slumps on record, analysts said.

"End of summer, early autumn, is a likely time for airlines to shut down. There are going to be more," said Nick Cunningham of Evolution Securities.

"This winter is going to be very hard with very weak traffic and even weaker yields," Cunningham said.

"If you think an airline is not going to be viable, then you shut it down. There is no point" in continuing to run it, he added.

Bratislava-based SkyEurope said last week that a court-appointed trustee had decided that a bankruptcy application was the only way forward owing to "the lack of sufficient interim funding to finance ongoing operations."

The airline had been in trouble for some months, not having the scale of the major low-cost carriers such as Ryanair or easyJet to survive the deepest global downturn since the 1930s.

"SkyEurope will not be an isolated case. There will be other low-cost carriers who are going to find it hard to get through the winter," said Yan Derocles of Oddo Securities.

Formed in 2002 as the market recovered from the shock of the 9/11 attacks in the United States, SkyEurope like many of its small rivals had only limited funding but hoped to cash in on the boom in air traffic in the following years.

However, "at the first shock, they struggled to survive because they had not increased their capital," Derocles said.

As the financial crisis took hold from late 2007, the global economy ground to a virtual halt, with airlines seeing traffic numbers tumble even as they grappled with soaring fuel prices.

"This is the worst crisis we have ever seen," International Air Transport Association head Giovanni Bisignani said in May, as passenger and cargo figures showed continued losses.

Ryanair, seen as the market leader, returned to profit in the three months to June after a run of losses but attributed the better performance largely to a sharp fall in fuel prices.

Chief executive Michael O'Leary said when the results were released in July that Ryanair would "be the only major European airline to deliver passenger and profit growth in the current year."

Low-cost carriers, unlike their traditional, full-service rivals, cannot rely on governments to bail them out if they get into trouble, Cunningham said.

However, there may be a silver lining to the recession cloud -- however much they suffer, the traditional airlines are doing much worse.

"Ryanair and easyJet have done much better than the large national companies such as Lufthansa, Air France and British Airways. Passengers looking to keep costs down are going to them," said Johannes Braun, analyst at Commerzbank.

The established airlines have suffered particularly as their premium business class customers have either moved down cabin or taken the low-cost route to save money.

With a high and inflexible full-service cost base, they have been on the defensive while the more adaptable low-cost carriers have been able to keep their expenses down, analysts said.