14 April 2023
The Rise of Airline Start-Ups
Opportunities and Challenges in a Post-Pandemic Market
The pandemic’s devastating impact on the airline industry has been well-documented. The global air travel market lost USD 140 billion in 2020, USD 42 billion in 2021 and is on track for a USD 6.9 billion loss for 2022.
A paradox within aviation (and more widely) is that periods of significant turmoil tend to lead to bursts of new life. Post 9/11, there was a low-cost carrier (LCC) boom; as the sector emerges from the shadows of COVID-19, aviation has witnessed a similar influx of start-ups.
Market analysis shows that the pattern is clear: the established network shrinks to cope with the challenging climate, opening opportunities for LCCs to expand and niche operators to enter gaps in the market. The pandemic also left a wealth of experienced pilots and engineers available at extremely competitive prices. Not to mention a glut of aircraft—carriers have been forced to cancel orders, terminate leases and retire aircraft, leaving investors in a position to benefit from lower capital investment.
Traditional airline operators have struggled with heavy COVID-19 debt burdens—the extent of which they could have never foreseen in their business plan. Yet, an airline start-up can enjoy a clean balance sheet, and more established LCCs are in a better position to take advantage of favourable lease rates and terms offered by lessors eager to place aircraft in a challenging market.
A number of flag carriers' capacity dropped in 2022, meanwhile certain low-cost airlines gained convincing market share as they were able to react more quickly to variations in demand. Ryanair operated roughly 10% of all European flights—a capacity increase of 9% compared to 2019. Central European low-cost airline, Wizz Air, increased its flights by 12% post-pandemic and accounted for 2.6% of all European flights during the 9-month period.
Ryanair operated roughly 10% of all European flights—a capacity increase of 9% compared to 2019
Central European low-cost airline, Wizz Air, increased its flights by 12% post-pandemic
Changing demographics
With globalisation’s increased connectivity and trade, the growing middle classes in emerging markets in Asia, Africa, Latin America and the Middle East are also fueling aviation growth and demand. Global air travel is expected to return to pre-pandemic levels by 2024, and expand substantially over the next two decades; consequently, there is no shortage of investment appetite. The average annual rate should increase by 3.3%, growing to nearly 8 billion passenger journeys by 2040. Asia-Pacific is the fastest-growing region and is expected to add 2.5 billion additional passenger journeys by 2040.
Low-cost carrier market share has grown exponentially over the last three decades from 1.6% in 1998 to 33% in 2022. Over the last 30 years, barriers to entry have lowered in aviation, such as the deregulation of the European air travel market. Technology has evolved, meaning off-the-shelf booking and demand management systems are now widely available and affordable.
Nevertheless, Ryanair CEO Michael O’Leary has predicted a forthcoming period of stability, and argues that these barriers to entry have started to rise. Aerospace duopoly Boeing and Airbus’ order books are now full until 2027, and higher interest rates and financial uncertainty could make it more difficult for airline start-ups to attract investors. Plus LCCs like Ryanair itself make it hard to compete by offering their target market the lowest costs in the industry. However, the number of new start-ups continues to rise.
Most start-ups focus on an under-resourced area—a new route, specific market or region
New recruits
In 2021, the world welcomed 58 new airlines, with only 32 closures. While last year saw the advent of roughly 130 more airlines launched, 63% based in Asia-Pacific.
Most start-ups focus on an under-resourced area—a new route, specific market or region. Nevertheless, getting a new airline off the ground is taxing. Few industries face as many variables, a majority of which are out of an airline operator’s control: weather, geopolitics, fuel price volatility, relentless competition and capital requirements.
The industry is also heavily regulated. While requirements will vary regionally, an airline must provide a detailed assessment of its operations, including financing, safety assessment, licensing and insurance, to gain approval to operate.
While demand and investment are onboard, infrastructure has caused some recent headaches for airline start-ups. Employees let go from the aviation supply chain during the pandemic have not necessarily been re-hired. These labour shortages have led some start-ups to take matters into their own hands and establish their own ground-handling operations at key airports and catering services.
How we can help
We recognise that starting an airline is tough; the risks and exposures associated with this class of business are extensive and their consideration must be intrinsic to the business plan. Airlines must be aware of and operate within a strict framework of regulations, standards and guidelines; therefore, from an insurance perspective, it is essential that they have specialist expertise in place at the earliest stages to get everything established on the right footing.
In this regard, Gallagher Specialty is here to help. As a world leading risk adviser to the global aviation industry, our team has a deep understanding of the complexity of airline risks. We have a proven track-record of working with some of the world’s most successful start-ups globally. We support entrepreneurs and organisations in launching new airlines across the full range of airline business models. From concept through to launch, Gallagher provides the necessary resources, advice and guidance to ensure our airline clients receive a competitive advantage and comprehensive cover that protects now, and in the future as your operation grows.
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