The Price Of Failure

But all three were heavily involved in contract and charter work at various levels, a field as competitive as any in aviation (particularly when it is exposed to the boom and bust vagaries of the mining sector), and their collapses illustrate that whether you’re operating ageing 737s or new E-Jets, you can’t make money in aviation in tough times with a compromised business model. Good luck and good economic times can’t be relied upon to continue indefinitely.

Clearly, after the boom years, when the downturn hit the charter market had too many players with too many aircraft chasing too few contracts.

From an industry-wide perspective the failures of the weak allow the strong to prosper, with the biggest beneficiaries of the three airline failures so far being Alliance Airlines and Regional Express/Pel-Air – well run businesses with scale, the right aircraft (second-hand, but still relatively young, so in the ‘sweet spot’ of the ownership cycle), and with disciplined managements.

Arguably then this Darwinian weeding out the weak is no bad thing if it leaves behind a healthier, more robust industry – unless of course you are an ex-employee now looking for work, or a creditor owed millions of dollars.

There is a real human cost to airline failures, as anyone employed by Ansett eight years ago well knows. OzJet’s collapse sees about 60 staff out of a job, SkyAirWorld had 140 staff, MacAir about 160. Hopefully many will find new work quickly, even if not at the same level of pay or responsibility (for example, some former SkyAirWorld pilots are now back flying turboprops with the regional airlines). But this is not the time to be looking for a job in the airline industry, with Qantas laying off up to 1750 people and Virgin Blue up to 400, as the big two make big cuts themselves to best cope with tough times.

And then there are the financial costs of failure. Reports suggest Brisbane based SkyAirWorld, which owes over $80 million to creditors, may have been trading while insolvent; while the MacAir liquidator is pursuing three former directors of that airline (including owner Terry Byrt) for $39 million, alleging MacAir too traded while insolvent (AA understands MacAir was in relatively good shape at the time of its sale to Byrt last year).

But it’s worth observing that financial harm spreads beyond those creditors owed money. Sadly, other aviation businesses become tarred with the same brush, with the industry as a whole stigmatised as being high risk. With each airline collapse it becomes that bit harder for other, healthier aviation businesses to obtain credit to finance aircraft. So banks’ and financiers’ fears that aviation is a risky business become a self-fulfilling prophecy – if credit becomes that much harder to come by then good businesses too will begin to struggle.

The cost of airline failures are mostly very visible – job and financial losses – but other costs can be unseen.