Why does an airline go bankrupt??

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Sadly we see news about airline closure in the world, but why does an airline go bankrupt? Here we review some of the possibilities and causes.

Regardless of the pandemic we are experiencing worldwide, which has forced dozens of airlines to seek state aid, private loans or enter processes under the Chapter 11 from United States, not all have had this luck.

Others have been forced to definitively close their operations and enter a process of liquidation of its assets to meet its previously acquired commitments.

Although the current situation is very particular, without a pandemic we still see news of airlines announcing their cessation of operations, so here we will review some of the most common reasons for reaching this situation.

Why do airlines go bankrupt??

Although there are endless reasons, We will try in this installment to detail some of the most common, so to speak., but without any doubt, there could be other factors regardless of whether this is a cargo or passenger company.

In basic terms, an airline enters the bankruptcy process when it runs out of money flow to cover its daily or imminent obligations with suppliers., investors, landlords, passengers, etc.

Aviation is generally thought of as a highly profitable, billion-dollar industry., in a few cases yes, but in general the margins are less than 5%, so any change in the market affects the indicators drastically.

The costs that a company incurs in the operation are the main elements to take into account, where these expenses include: pay accrued wages, pay suppliers or cover the payments of your debts.

So in the multiple motives we have:

Costs control

It is a key point for the survival of an airline, poor handling of fixed and variable costs of the company will generate a lack of control in expenses leading to over-indebtedness and loss of profitability.

This situation occurs more in traditional or legacy airlines, which generally maintain 50% higher administrative expense versus a low cost one potentially leading to closure if not course corrected.

Combustible, spare parts, fleet diversification, overstaffing, opening of routes that do not justify a profitable demand and increase in the price of fuel is some of the factors to take into account.

external situations

This is possibly the most complex point to control for an airline and cash flow is essential to counteract these situations.:

• Economic crisis of your country of origin or global.
• Natural phenomena such as earthquakes, hurricanes, rashes, etc.
• pandemics.
• Terrorist attacks.
• wars

point of order, no airline has been seen to close due to a hurricane, but they are situations that can harm your financial flows and that, if added to other situations such as the first point, could trigger bankruptcy..

Inability to adapt or evolve

In recent years, possibly a few 5 a 10 years ago, the appearance with force of the airlines low cost has led to change the way of flying in the world.

In this change of way of flying, we have all had to adapt to the new conditions, where you pay less and receive less, but that has undoubtedly greatly captured the consumer by democratizing aviation so that everyone can fly.

With this “threat” to legacy airlines growing day by day, even in crisis, It has generated that many have not changed their mentality in time or generated strategies to sustain their market, lowering their income and finally leading to the definitive closure.

administration

This is a complex point to analyze., but that undoubtedly goes hand in hand with cost control. We have seen many headlines that X airline went bankrupt due to mismanagement, But what does this mean?

A mismanagement comes from its decisions that at the time are wrong and affect the finances of the airline, such as:

• Negotiation of lease or purchase of aircraft.
• unprofitable routes.
• High administrative expense.
• Excessive non-operating expenses.

Something important needs to be clarified., airlines generally do not go bankrupt at the onset of a crisis, let's say economic, It generally occurs over the weeks when the money in the cash is running out until it reaches a point that makes the operation unsustainable., planes are left on the ground and they do not take off again.

What is the bankruptcy of an airline that you remember the most or that caught your attention?

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