What's going on?
The UK saw its biggest ever collapse of an airline on Monday, when Monarch Airlines filed for administration (a.k.a. bankruptcy) – investors are now cheering on its competitors.
What does this mean?
Monarch was profitable for decades before it transitioned from a packaged holiday airline to a budget airline in 2010, competing with the likes of Ryanair and EasyJet. But Monarch consistently struggled to break into the market without losing money. Recently, it has also struggled for market share as instability in Turkey and North Africa prompted its rivals to divert more planes to servicing Monarch’s core market of holiday flights to Spain and Portugal. This significantly increased capacity on these routes – pressuring Monarch to slash its prices. As if that wasn’t enough, the weaker pound since the Brexit decision added to the pressure as Monarch had to pay more (in pounds) for its fuel, shipping and other charges.
Why should I care?
The bigger picture: This is the third European airline to go bust this year! (tweet this)
Fierce competition in short-haul flights pushed Air Berlin and Alitalia to insolvency this summer. It appears there are too many airlines serving the same routes, meaning they have to lower their prices (and thus profits) to entice customers. Perhaps the solution can be found a long-haul flight away: in the US, airline mergers over the last decade or so have reduced the number of major airlines from nine to four – in the same period, airfares have risen and profits have improved significantly.
For markets: Investors expect Monarch’s rivals to gain from its bankruptcy.
Investors are expecting Monarch’s demise to lead to reduced overcapacity, which should be beneficial for the industry. Share prices of Monarch’s competitors – like EasyJet, Ryanair and Wizz Air – all jumped on Monday. Some rivals could benefit by buying up Monarch’s planes at cheap prices, while others would benefit simply from less competition, meaning they could possibly raise prices and improve their profitability.