Why Startups Should Pay Attention to the Collapse of EU Discount Airlines
Low cost airlines in Europe are dropping like flies. In the last few months, Cobalt Air, Primera Air and Skywork have all ceased operations, leaving many passengers stranded with worthless tickets home. Released statements from these airlines have pointed to rising fuel prices, weak consumer demand, pilot shortages and the growing concerns on the effects of Brexit as reasons for their demise.
And it's true. The current climate has not been in their favor. In September, we witnessed a sudden 30 percent rise in fuel costs which pushed industry profit margins below 8 percent in the second quarter. Moreover, the plunge in sterling exchange rates since the Brexit referendum has deterred many Britons from traveling.
However, these small and fairly new airlines have been battling against a much stronger headwind that has blown in from undercurrent issues that apply for any industry. EU discount airlines face the challenges and turbulences that any startup encounters when trying to compete in an overly competitive market and against more established players.
As someone who has tried and failed to launch his own EU airline, I learned that for new airlines to stay airborne in Europe they have to be better, be cheaper, offer something different or take their business elsewhere. But, more importantly, I found that these rules, in fact, apply to startups in any industry.
Never launch into a congested market.
The first rule of business is never launch into a highly contested market. Something which Cobalt, Primera and Skywork all seemed to have ignored. Europe is home to some of the most dynamic and aggressive low cost airlines in the world, such as Ryanair and Easyjet. These carriers have advantages in their size, their reach and their economics. Not only can they buy and lease aircraft and fuel at far cheaper costs, but they can negotiate landing fees at a rate new airlines cannot match.
EU low-cost carriers also have to out-fly national airlines which have their own advantages in terms of customer loyalty, brand recognition and slot access. Europe is therefore saturated with airline options, all offering the same routes, and a higher quality of service, giving them the upper hand on smaller discounted airlines.
Startups attempting to break into other highly congested environments, such as the food delivery market, would experience the same setbacks. UberEats, Deliveroo, HelloFresh, Just Eat and Delivery Hero dominate the European food delivery market and a new startup would be foolish to try and compete.
Find a wrinkle.
The only way EU discount airlines are ever going to survive this tough market is if they bring something new to the table, something that hasn't yet been exploited by the likes of Ryanair or Easyjet.
Smart airlines, and startups in general, are the ones able to find a wrinkle. For example, in 2000, British Airways was the first to introduce fully flat seats in business class, which was considered revolutionary. Primera Air attempted to roll out new transatlantic routes last year, however even this gap has been successfully filled by Norwegian and WOW Air.
Successful startups, such as Airbnb and Uber, uncovered niche opportunities that others had not even attempted to test. EU discount airlines need to do the same. This could be allowing pets on flights, building wider bathrooms or having oxygen supplies onboard for older travelers.
Simple niche opportunities present issues in sustainability. It does not take long for an airline like Easyjet or British Airways to respond in kind with similar services. British Airways, for example, could start allowing pets on flights if a smaller airline had demonstrated that there was a demand for it. And as a recognized brand with frequent flyer programs, customers will remain loyal to them over a new, unknown carrier.
Go cheap or go home.
In general, people are extremely reluctant to pay more for additional extras. While traveling, customers are usually happy to accept higher levels of discomfort in return for a lower seat price. For example, Ikea has made billions from customers who go through the agony of having to construct furniture themselves, just to avoid expensive costs and delivery fees.
However, these days providing a cheaper product or service is extremely difficult. New EU discount airlines will have no economies of scale. There is no competitive advantage. A new airline can only compete on price against incumbents by losing money. Eventually, as we have seen, the new airline bankrupts itself in the chase for market share. Larger, established airlines can keep flying and take some short-term losses while they wait for the new airline to fail, which is exactly what happened with Primera, Cobalt and Skywork.
Airlines need to have more cash to lose than all the other successful airlines, just as startups need to have the funding to launch, scale and swallow setbacks.
Look to new horizons.
When a market, or industry has been completely availed, it's only logical to look elsewhere.
New airlines, like all entrepreneurs, need to be adventurous and look onwards to the next market to conquer. Arguably, for aviation this lies in new regions outside of Europe, such as North Africa. Yes, they have their own string of obstacles, including arduous regulatory environments, however these new voyagers won't have big competitors such as Easyjet and Ryanair weighing down their wings.
Europe's aviation market has been wrung dry, and any new discount airline that tries to navigate its way through is only going to fail. Primera Air, Cobalt and Skywork all sought to compete in a contested market and crashed. For a discount airline to succeed it needs to launch into an uncongested environment, find a wrinkle, keep pricing down or unearth new markets -- advice which is applicable to startups in any industry.