Ryanair is floundering: pilots are striking, flights are being canceled, and the company is making some seriously bad press moves. All of this has led to its stock dropping sharply.
But this isn’t just about Ryanair — it’s also about the air travel industry as a whole. Air travel has been suffering, especially in terms of smaller carriers. This could have some consequences for investors.
Ryanair’s Public Fight With Its Pilots
In order to improve upon profitability, some smaller airliners have been paying their pilots less than the pilots feel they deserve. Ryanair has been notorious for unpleasant but cheap flights, but in recent years has repeatedly come under fire for mass cancellations and flight discontinuations. Currently, Ryanair’s pilots are striking, and the company’s profits have dropped by 20%. This comes on the tails of unionization, which caused Ryanair to have to increase its labor costs earlier this year.
Ryanair is not alone. Italy’s Alitalia has recently experienced similar issues, being declared insolvent in May. Meanwhile, the British company Monarch was forced to halt operations in fall, leaving 110,000 of their customers unable to get to their destination. Many of these smaller companies are having issues with their income and their profitability, while larger companies are folding their operations into each other.
Why is Air Travel Stagnating?
Stories about terrible flights are common — so common, in fact, that it’s become a joke. But why is air travel so unpleasant? Why has the industry stagnated? In fact, though public perception of air travel is that the the industry is failing, demand has never been higher. Demand for air travel has been steadily going up, but the profitability of each airlines is not assured.
Air travel hasn’t changed in the last two decades. This is largely because air travel is extremely dependent on a multitude of external factors. There is an upper limit on how much someone will pay for a flight before they stop traveling. When oil and gas becomes more expensive, costs go up for the airlines while they are unable to increase their flight income. When the economy suffers, airlines suffer as well.
This has led to an increase in mergers an acquisitions throughout the air travel industry, with many airlines merging with others. It’s expected that air travel fares are going to rise 2.6% in 2019. Companies need to become as competitive as possible to survive as air travel prices continue to go up. Companies that aren’t going to be competitive have to be bought out by other, more successful companies.
That’s not to say that the airline industry isn’t improving. In 2013, Warren Buffett called the airline industry a deathtrap for investors. He followed this up in 2016 by buying more than $1.3 billion in airline-related stock. However, it’s notable that his purchases were of some of the largest companies in the industry — not the smallest ones. These smaller ones are more likely to be consumed.
Disruption in the Airline Industry
The past isn’t all that the airline industry needs to worry about; it’s also the future. In recent years, there have been many changes made to the technology used to track and price different flight deals. Today, a customer can easily jump on Google, use flex dates, and locate the most affordable airline available. This is another issue that has caused many airlines to merge, as it’s now more difficult to remain competitive.
That’s not the only disruption that could be coming. Others worry that the airline industry could quickly switch to a model with smaller, on-demand flights. Rather than gigantic sky busses, customers may prefer to pay slightly more to fly on a smaller aircraft with more legroom. New technology is making it easier for these smaller carriers to plan out their routes and move towards profitability.
Ryanair is a unique company, insofar that it has never had a particularly good reputation among its clientele; it has always marked itself as a bottom-of-the-bin, budget carrier. However, its problems are not unique. Smaller carriers are feeling the strain of the global economy, and even though oil and gas prices are decreasing, labor costs and marketing costs are going up. Those interested in investing in the airline industry may want to consider how competitive the market is; it may be that the major players in the industry are the only ones that are truly secure.
Regards,
Ethan Warrick
Editor
Wealth Authority
