Airlines are selling 'too many' seats on the cheap
TOO many cheap seats are being sold by airlines, and the sector will see a moderate decline in profitability this year, according to Dick Forsberg, head of strategy at aircraft leasing giant Avolon.
Mr Forsberg said that while supply and demand in the airline sector is "nominally in balance", carriers aren't selling enough expensive seats.
"Airline profitability remains highly concentrated, with over 45pc coming from North American carriers," he said.
"A slew of airline failures during the course of the past 18 months, plus several more in intensive care, suggests that full planes are not always cause for celebration."
Last week, German airline Germania went bust after it failed to secure additional investment to see it through a cash squeeze. Scandinavian airline Norwegian has also been forced to secure a fresh equity investment to keep it in the air.
Mr Forsberg said the deluge of cheap seats being sold is the fault of airlines, but also of aircraft manufacturers, coupled with cheap finance. He said plane makers "continue to sell the dream of greater efficiency, longer range and lower seat costs, especially when ordered in bulk.
"This formula only works when airlines compete rationally and resist the temptation to chase market share and load factor through irrational pricing," he said.
Avolon is the world's third largest aircraft lessor and was co-founded by Dómhnal Slattery.
It has an owned, managed and on-order fleet of 971 jets. It is majority owned by Bohai, with 30pc now owned by Orix.
Mr Forsberg added that some airlines without sufficient hedging will be exposed to continued oil price volatility.
"In this fuel price environment, the most effective hedge against oil price movement for airlines is operating the most fuel efficient fleets," he warned.
"For lessors, the ability to apply appropriate risk-management processes to their airline customers, and pick up early warning signs of trouble ahead, will be critical in determining success."