Too much inventory, not enough space

This was a press release headline I saw today. It wasn’t about aviation, but it sums up the current situation in Europe pretty well.

Airlines are facing too much inventory – overcapacity – while customers complain about being packed in tighter than ever before, as airlines strive to minimize their unit costs.

That overcapacity gives customers lots of options, putting pressure on yields, which puts airlines under even more pressure to cut unit costs. It’s a vicious circle.

The press release that I spotted was about companies running out of room to store their products, forcing them to take external storage to free up space and cut costs.

But airlines can’t do that. Once a seat has flown, it’s flown, so European airlines are caught between wanting to keep their aircraft (expensive assets) flying to generate revenue, but having to cut fares to fill them.

This winter, Ryanair expects average fares to fall by 10-12%, but it is still pumping seats into the market to maintain traffic growth.

Ryanair follows a ‘load factor active, yield passive’ strategy, putting pressure on rival airlines with weightier cost bases to either match its low fares (forcing them to take a financial hit), or lose business.

One of the markets Ryanair is aggressively attacking is Germany, adding 400% capacity in Nuremburg, 180% in Hamburg and further growth in Cologne for next summer.

It comes as no coincidence that airlines like airberlin and TUIfly are having to make big changes to compete.

The alternative to filling seats at any cost is to get rid of the aircraft, but this also comes at a price. There is no way, in an ideal world, that airberlin would want to hand over a huge chunk of its fleet to its main rival, Lufthansa, for Eurowings. But that’s what’s happening.

After all, having more seats to minimize unit costs is only of value if you fill them profitably.

Victoria Moores [email protected]