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The Collapse of Monarch Airlines: The Outlook for the Airline Industry

 4 min read / 

On Monday 2nd October 2017, Monarch airlines filed for administration.

On the surface, this incident seems to be devastating, as Monarch was the UK’s fifth largest airline – approaching 50 years of trading, covering 40+ destinations, having a fleet of 30+ aircrafts and transporting millions of passengers annually. Furthermore, the UK government has been left with the task of repatriating over 100,000 passengers stranded overseas, whilst Monarch’s employees face redundancy. However, this development may not necessarily be as devastating as anticipated, depending on stakeholders’ actions and the corresponding perspective adopted.

Passengers

From the passengers’ perspective, they can look forward to dynamic efficiency. The incumbent airlines should see an increase in profits as they take over Monarch’s market share. In theory, these airlines could invest in research & development (R&D). Over time, when the innovation comes to fruition, the passengers would then experience an increase in utility.

However, there is room for exploitation as the concentration increases; the market could take the form of an oligopoly. If there is some form of implicit coordination, this will allow for the exploitation of passengers through pricing. Furthermore, given the capital-intensive nature and high fixed costs of operating airlines, there are significant barriers to entry in the market, which means exploitation could be a long-term problem unless there is government intervention.

Case Study: The U.S. Airline Industry

Over the past decade, there have been several mega-mergers which have transformed the competitive landscape of the U.S. airline industry. There has been a reduction from nine major airlines to four: American, United, Delta and Southwest. According to the data published by Diio (an airline schedule tracking service):

  • 40 of the 100 largest U.S. airports (an increase from 34 previously), is now dominated by a single airline, as measured by the number of seats for sale
  • 90+ of the 100 largest U.S. airports (an increase from 78 previously), is now dominated by two airlines, as measured by the number of seats for sale

Over this period, the increase in domestic airfares has exceeded inflation, and U.S. airlines have seen their profits rise.

Competitor Airlines

From the competitors’ perspective, they would be pleased as stakeholders – and in particular, investors – will have improved confidence. When Monarch’s closure was announced, competitors such as easyJet and Ryanair saw their share prices rally. As KPMG begins to carve up Monarch’s assets, it will provide incumbent airlines with the opportunity to acquire Monarch’s lucrative take-off and landing slots, and their fleet of aircraft and buildings.

On the other hand, this highlights the ruthlessness of capitalism. Monarch is the latest victim reflecting the fierce competition in the European short-haul market. Earlier during the year, Air Berlin (Germany’s second largest airline) and Alitalia (the flag carrier for Italy) had both filed for bankruptcy. However, given the nature of Chapter 11 Bankruptcy in Italy, Alitalia that has been described as ‘too Italian to fail’ has been able to continue their operations.

On the other hand, Monarch had not been offered any form of special treatment, which will be a reminder to rivals that they are operating in an environment where it is the ‘survival of the fittest’. Consequently, how incumbent airlines adapt their strategies to improve financial performance will be interesting and remains an open-ended question.

Furthermore, competitor airlines will be forced to look for a new benchmark for prices.  Over the last few years, Monarch faced a combination of falling revenues and increasing costs, making it difficult for them to keep up competitive pricing. Rivals could, if they wanted to, use Monarch’s pricing as a benchmark, then slightly undercut Monarch and maintain their edge. This is a scenario that can be modelled under the framework of game theory, and further tools and techniques can be applied to gain an insight into the pricing strategies adopted by firms.

Many projections can be made regarding the direction the U.K. airline industry will take over the coming years, and ultimately only time will tell.

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