Another European Airline Is In Financial Trouble

The European airline sector is feeling the effects of overcapacity, a higher oil price, and political events such as Brexit, all of which are sending jitters across the stock market.

An upcoming Winter season of lowered demand has already been enough to hurt profits at even the most profitable airlines, and in the last month alone, European airlines ‘Cobalt’ and ‘Primera Air’ have both collapsed, ceasing all operations indefinitely.

In Slovenia, the future of the national airline is now on the line —

Star Alliance member, loss-making Adria Airways has been ordered by the Civil Aviation Agency of Slovenia to provide proof of financial stability by the end of the year, specifically through the injection of fresh capital, or it will face having its Air Operator’s Certificate (AOC) revoked, amid fears the airline would collapse. The warning comes at a time where Adria Airways’ CEO, Holger Kowarsch, warns the airline will post a financial loss in 2018 for a second consecutive year.

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Operationally, Adria Airways (a private company, not government owned) has been suffering for quite a while. It’s fleet, made up of Airbus, Bombardier, and Saab aircraft often face technical issues which result in the cancellation of at least two flights per day. The CEO’s excuse for the frequent cancellations is ‘a crew shortage and technical problems’. While the industry is facing a pilot shortage as a whole, ongoing aircraft technical issues will put Adria in an even worse position. The CEO added that this year’s winter season will see the airline focus more on the stability of operations, as the current rate of delays and cancellations simply isn’t sustainable.

Despite being a member of Star Alliance, which helps passengers flow from other member airlines onto Adria flights, the Slovenian carrier faces weak load factors throughout the winter season. Adria often has trouble achieving a 55% occupancy rate on its A319s. While their summer seasons are promising, the summer demand ends abruptly in September.

In fact, the bleak prospect of flying empty during the upcoming winter season has led to Adria Airways signing a deal that will see the lease of all three of its Airbus A319 aircraft to Lufthansa. In a bid to keep its aircraft flying (the only way an airline can even attempt to make money is if an aircraft is airborne) Adria is also leasing aircraft to Luxair, Austrian Airlines and Swiss. It means Adria Airways’ fleet will reduce to 12 aircraft, relying on revenue from leasing deals with other European operators, rather than its own fare-paying passengers.

The Slovenian carrier faces fierce competition across the continent, but specifically from low-cost Eastern European giant Wizz Air — a very profitable airline group, dominating the air travel sector in the region. But even Wizz Air CEO József Váradi has warned that current cost pressures “could mean fares – and those in the wider industry – move up if the cost environment changes”.

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He added that smaller rivals will suffer before Wizz Air does.Wizz Air’s growth is continuous, and the airline currently has an order with Airbus for up to 200 A321neo aircraft. Adria is also up against fellow-Star Alliance member, Croatia Airlines, as well as profitable ultra-low cost airline, Ryanair.

Fuel remains one the biggest costs for airlines, often making up over one-third of operating expenses. Back In 2016 oil prices saw airlines fuel bills drop from $140 a barrel to $40. This significantly helped many airlines profits. However, today a rising oil price means the cost of fuel is back at nearly $100 wiping out a lot of profit and increasing expenditure.

With Adria’s long-term future on the line, its largest investor, German financial fund 4K Invest has today announced it intends to recapitalise the Slovenian carrier by the end of the year, by injecting at least €10m.”The airline the carrier would also be restructured” (again). The extra €10m is to avoid the airline disappearing, for now.

Final Thought

Slovenia’s largest airline is being given a temporary lifeline, in the form of another cash injection. Ultimately, the airline had hopes of being the main and busiest airline bringing Europe to Slovenia, and taking Slovenia to Europe — but it’s not working.

Adria Airways not only face fierce low-cost competition, but the airlines’ operations are known for being consistently unreliable. Flight cancellations are incredibly costly for any airline, and airlines would rather delay a flight by 10 hours instead of cancelling. For a small, loss-making carrier like Adria, the effects of cancellations are even harsher.

Furthermore, it should be noted that the airline’s struggling with ‘ongoing technical issues’ with its aircraft is…unusual. Passengers have written to me to express their concern given Adria Airways have been citing ‘aircraft tech issues’ as a reason for its disruptive flight schedule for the last five years.

While leasing contracts to other European airlines may carry Adria Airways through the winter months, it’s by no means a sustainable plan for a national, flag carrier airline with no clear strategy for the future.

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