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Flybe faces struggle to raise finance as high costs force airlines into bankruptcy

Posted by Warwick Business School at 13 January 2020, 15:15 CET |
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Professor Loizos Heracleous, an aviation industry expert from Warwick Business School, said:

"Reports that Flybe is seeking a fresh rescue deal come in the wake of numerous European airline failures, including Air Berlin, Monarch, Flybmi and holiday firm Thomas Cook.

"Attracting new finance will be no easy task. The aviation industry is an unattractive industry in terms of performance and returns on investment at the best of times.

"It is saddled with high cost assets, namely planes, and key costs that fluctuate uncontrollably, mainly fuel, which accounts for around a third of total airline costs. On top of that they face high regulation, often aggressive unions, low barriers to entry that increase competition, and high bargaining power of buyers.

"Increases in industry profitability after 2011 were aided by lower fuel prices, but with fuel prices on an upward trend since 2016, the performance of some airlines (particularly if they pay for fuel in sterling) has taken a hit. Political uncertainty does not help.

"There will undoubtedly be more bankruptcies. For example, in 2017 we saw 79 new airlines enter the market, while 25 went bankrupt. The failure rate was even higher in Europe, where 29 airlines were started and 14 went bankrupt. In the medium to long term the European aviation industry may move towards higher levels of consolidation where the weakest players get weeded out or taken over.

"Airline bankruptcies inevitably lead to frustration for stranded passengers and unfulfilled plans. Some relief can be gained by obtaining a refund and making alternative travel plans, if tickets are purchased by credit card, if the trip is ATOL protected, or if there is relevant travel insurance. European law also provides for refunds for cancelled flights unless the airline can argue that extraordinary circumstances were the cause."

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