SKP: Legacy airlines need to consider price surchages

16 July 2013

Surcharges may well be the only way back to profitability for legacy airlines,'' claims Jonathan van Spijker Baan, Senior Consultant at Simon-Kucher & Partners in Amsterdam.

European and local regulatory authorities have recently launched several initiatives to increase price transparency in the travel industry. Key objectives include more price-transparency, ensuring advertised prices include all unavoidable costs and that consumers can select optional services themselves by 'opting in.' Hard measures will be taken for businesses that do not comply with the rules.

The industry is, however, still gearing towards more unbundling: charging fees for services that used to be part of the regular ticket price (e.g. checked luggage and seat selection). Low cost airlines started off long ago. They successfully took away a large share of the market from legacy carriers by offering attractive ticket prices to consumers. Consumers then could choose the additional services they desired. As Ryanair's CEO Michael O'Leary once put it, the airline industry is similar to the cinema industry in its potential to someday generate more revenue with non-ticket sales than with ticket sales.

simon kucher partners baggage

Price unbundling

Once unimaginable, legacy carriers are now starting to unbundle as well. KLM and British Airways have recently started charging for checked bags, supposedly to allow them lowering base ticket prices to improve competition with low cost carriers. At the same time, low cost airlines take unbundling one step further by applying price discrimination techniques not only to tickets, but also to surcharges. Ryanair currently differentiates its prices for checked bags and for seat reservations based on flight date and destination.

Although it may be claimed that further unbundling is not necessarily beneficial for consumers, it seems to be the only way back to profitability for many companies in the travel industry. ''Price comparison websites have made price the most important weapon in the market share battlefield. At this point surcharges may be the only way of generating additional revenues,'' says Van Spijker Baan. ''Legacy airlines in particular should take the opportunity of using these surcharges to accentuate their added value, as in their struggle to regain profits they are unlikely to win the cost-cutting battle against the low cost carriers,'' the consultant adds.

While surcharges may make price comparisons more challenging from a consumer perspective, Van Spijker Baan points out that in the long run consumers may benefit from clearly communicated, optional surcharges. ''Surcharges will result in lower ticket prices and more freedom in purchasing tailor made travel products for the consumer,'' he explains.

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BDO administrates Flybmi amid aviation industry turbulence

21 February 2019

Around 400 jobs in the UK, Germany, Sweden and Belgium have been lost following the collapse of commercial airliner Flybmi. The administration, which will be overseen by professionals from BDO, constitutes the third failure of a commercial carrier since the start of 2019, with the industry having suffered from sustained turbulence for the duration of last year.

The initial 4 a.m. announcement informing customers that Britain’s longest-surviving airline, Monarch, had been placed into administration meant that many passengers arrived at airports only to find their flights cancelled and holiday plans inconvenienced, while many were left with no means of returning to the UK. Beyond the immediate ramifications, however, the collapse of Monarch also drew to a close six years of steady improvement for commercial carriers across the world. 

Since the economic shock of 2011 – an echo of the 2008 financial crisis – the number of commercial airlines falling into administration across the world declined at a relatively consistent rate. According to data from – barring an anomaly of a year which saw only four airlines falter in 2014 – the number of collapses in the sector declined continuously. In 2017, the figure stood at just 10, compared to a huge 46 in 2011, and a  staggering 61 in 2008.

Global number of airlines to have failed since 2005

Following Monarch’s precipitous fall, however, the situation once more seems to have commenced a nose-dive in the following year. 15 airlines failed in 2018, and less than two months into 2019, another three have followed suit. That puts 2019 on pace to reach 24 airline collapses. 

The latest of these firms to spiral into administration is Flybmi, an East Midlands-based airline which until February operated 17 regional jet aircraft on routes to 25 European cities. The company operated more than 600 flights a week from regional airports including Bristol, Newcastle, Aberdeen and the East Midlands.

News of the firm’s demise emerged as it cancelled hundreds of flights at short notice over the space of a single weekend, leaving many passengers stranded and out of pocket. Flybmi advised customers to seek refunds from credit and debit card companies, or to rebook with other airlines, before eventually appointing administrators from professional services firm BDO.

The appointment, initially reported by UK paper The Telegraph, came following a weekend of chaos, with passengers and staff desperate for information, but without an administrator to turn to, as authorities had remained tight-lipped on the matter. The process was reportedly delayed until the following Monday by a Scottish law which prevents insolvency specialists being appointed over the weekend.

Turbulence ahead

Commenting on the task at hand, BDO Business Restructuring Partner and joint administrator Tony Nygate said, “As joint administrators, we are taking all necessary steps to ensure customers, staff and suppliers are supported through the administration process. Our job is to maximise recoveries and minimise distress for all parties, acting as smoothly and swiftly as possible.”

Administrators from the firm now face questions over what preparations were in place prior to the carrier’s collapse, including actions that could have softened the blow for thousands of stranded passengers. Meanwhile, some 376 employees in the UK, Germany, Sweden and Belgium have been made redundant, with the remainder staying to assist with the administration. Unions have since demanded urgent talks with Flybmi’s administrators, with Unite, which represents about 40 of the airline’s 376 staff, calling for a buyer to be found in order to ensure wages are paid in full.

Unite Regional Secretary Paresh Patel told the press, “Unite is shocked and saddened by the news that Flybmi has gone into administration…  This is a terrible blow for the airline’s workforce and their families, as well as the East Midlands economy. We will be giving maximum support to our members who work for the airline across the UK at this very difficult time for them.”

The Brexit process seems to have played a key role in the downfall of Flybmi. Airlines are required by law to purchase carbon credits to offset their carbon emissions – something which until recently was subsidised through a free allocation of credits by European authorities. Now, however, Brussels has excluded UK firms from their allocation of credits ahead of the UK’s divorce from the EU in March, and it is anticipated that this may  well lead to more casualties in both the airline industry, and the broader British economy.

Glen Flannery, a Partner at law firm CMS, told The Telegraph, “The European Commission has started to implement its No Deal Brexit contingency plans. With effect from January 1st, it has temporarily suspended the UK’s free allocation of carbon allowances, auctioning, and the exchange of international credits. This has created a huge amount of uncertainty for UK participants, the full effects of which have yet to play out.”