Five Big Reasons That Airlines Fail

Pan Am, Braniff, PeopleExpress. More recently, Norwegian Air and WOW. The airline industry has had plenty of successes but also some spectacular failures. Sometimes a failed airline gets acquired by another and its routes, planes, and people live on in a new life. USAirways was that way. Other times, the airline just becomes a memory for some and a fond memory for those who used to work there or fly on that airline.

While airlines of all types have failed, the reason they failed all follow a similar pattern. There are five important reasons that airlines have failed, and knowing these reasons, and avoiding them, can help to reduce the number of future failures. Here the big five:

Failure To Keep Costs Low

When recruiting a potential new Chief Financial Officer to an airline I worked for, the candidate was hesitant in part because the airline was smaller than the company he was working for at the time. The CEO told him “but we’re a $6 Billion company, and even larger of you measure by costs!” While said a joke, this condition is common among many of the failed airlines around the world.

Most airlines are price-takers, meaning that they adapt to prices set by the market rather than being able to control their own pricing. Yet every airline controls most aspects of its costs. Airlines that have failed have not properly addressed the gap between attainable revenues and costs incurred. This may be because they chose a business model that they expected to drive more revenue, and but when this didn’t happen they had already spent the money to support the business approach. It may be because they signed inefficient contracts, or took a “but if we invest now, the revenue will follow” approach. No matter the business model, most airlines can be more efficient and cost control is critical for any airline operating today. In United’s “Next” plan, controllable costs were one of the four key pillars of that plan.

Grew Too Quickly

Airlines are businesses with good scale economy, meaning that as they get larger, fixed costs are spread over a widening base. Some airline failures are because the company grew too quickly for their teams to be able to manage the growth. This “getting ahead of their skis” approach ends up distracting the company, often frustrating passengers, and often requires outside capital expense long before the routes fully develop. The balance between manageable growth and accelerated growth can make the difference between an airline that thrives and one that dies.

Growing too quickly can cause signifiant pressure on crew training, and ends up having too much of the network in “spool-up” mode. In the push to increase the ASMs, and thus lower the costs per ASM, the company falls far behind the revenue curve. They also potentially end up fighting competitive battles on many fronts, with not enough resources to defend everything. Growth is good, excessive growth can be fatal.

Got Out Of Their Lane

What airline buff can forget PeopleExpress flying Boeing747s from Newark to Brussels, or even worse a small and young America West starting to fly from Phoenix to Nagoya, Japan? These actions, and others like them, represent a big departure from what the airline earlier found success with and financially crippled these companies. WOW was similar, successfully flying to smaller narrow-body Airbus A320s and A321s. But with just over a dozen planes, the airline leased very expensive Airbus A330 wide bodies to fly from Iceland to the west coast of the U.S. These aircraft distracted everyone in the company, and filling them took precedence over every other plane in the network. The seasonality of Iceland was not properly considered, while this could be controlled with the smaller planes on shorter distance flying by changing destinations in season.

Success at one thing doesn’t predict success in another. Eastern Airlines pilots who lost their jobs after that airline shuttered started a new airline – Kiwi – that was a financial disaster from day one. It turns out knowing how to fly planes had little to do with running a financially-successful airline. Often driven by overly ambitious fleet decisions, some airlines have extended their reach in ways that put pressure on everything else the company had done to that point. Trying to be all things to all people is also a recipe for disaster, yet a plan followed by many failed airlines. Airlines who find a profitable niche need to think long and hard before deciding to break out of that niche. RyanAir and Southwest have been successful for decades because they understand this.

Didn’t Pay Attention To Detail

In the best of times, airlines are a relatively low margin business. An extra few hundred basis points of unit costs can be the difference between profit and loss. The airlines that have failed did so in part because they did not pay close enough attention to every detail in the company. Examples include schedule efficiency and “turn time”, the amount of time the plane spends on the ground between flights. Another example is a close reading of every contract to know where costs could be increased or exposures lie. But the biggest example is knowing where the company makes and loses money, and having the willingness to change things to improve the results.

When I first became the CEO at Spirit Arlines, the online travel company Expedia represented 3% of our revenue and 25% of our distribution costs. While the company liked being available in Expedia, they had failed to recognize that Expedia sold only the lowest prices when Spirit was the only option, and charged Spirit a lot for that. We cancelled our agreement with Expedia, deciding it was worth risking that small amount of revenue. Five or so years later, Spirit was back in Expedia with a significantly restructured deal. Early in my career at American Airlines, I heard then CEO Bob Crandall ask a station manager, in a large employee event, how much that station spent on rags in the prior month. He then told the crowd “if you run a station and don’t know how much you spend on rags, you don’t know enough about your station.” There is no detail too small to watch when running an airline and if not watched things can get out of control. Airlines that have failed often didn’t see the car coming head-on into them.

Based Decisions On Emotion Versus Data

The term “that route should be working” is something mediocre route planners say, and then they keep the route in the network even though it has lost money for each of the last 12 months. Deciding on business goals that aren’t tied to financial results is the reason that many airlines have failed. “Our customers love the wifi” , but the wifi costs a signifiant amount and no one pays for it, so the airline margin shrinks. From fleet decisions, to seating configurations, to network decisions, and even employee practices, failed airlines often went by their gut rather than following the numbers and creating dashboards showing them what is really happening. If you know something is wrong, there is a good chance you can fix it. But if you let emotion win the argument about what should be done, be prepared for a worsening financial picture.

There are of course other reasons that airlines have failed. The Pan Am flight 103 explosion over Lockerbie, Scotland was the final nail in that airline’s coffin, but the airline suffered from at least four of the five items mentioned above before that bombing. The airline industry is ripe with big characters with bold ideas, but not all of these ideas have worked. The most successful airlines today do not let any of the five items shown here hurt their business. It is the airlines that don’t put in the hard work, and let their intuition drive their strategy, that ultimately fail.