Too many ducks in one pond - a study of the Swedish domestic airline industry and its prospects

Abstract: This report is intended to outline the domestic airline industry in terms of capacity and forecasts, and to analyse the financial condition and prospects of its operators. The outcome of the study has been severely impaired by the insufficiency of information supplied by airlines, which has rendered the report more indicative than was initially my intention. The domestic airline industry, after suffering from post 9/11 turmoil, has recuperated well and generated a 3.4% annual growth during the first 8 months of this year. Considering economic growth forecasts as well as estimations made by LFV, the domestic air travel market is expected to grow at around 3% in the short term. This growth will however be far from sufficient to bridge the vast gap between industry capacity and utilisation. With an average industry cabin factor of roughly 60% during the first 6 months of this year, an approximate two million seats were unoccupied during the period. It is clear that this overcapacity must be corrected, and while doing so most airlines are suffering. SAS, benefiting from the advantage of being the Swedish Goliath, is expected to turn its recurring negative result around as its restructuring is coming into effect. In the meantime SAS is able to endure the turbulence with its comparatively solid funds. Malmö Aviation is the only airline that has published a first half (2005) close to break-even result. Fleet reductions as well as renegotiated salaries in combination with financial streamlining have enabled, on a relative base, an impressive six-month period. Taking this positive performance in combination with an adequate wallet, Malmö Aviation appears to be at least a short to medium term survivor. Skyways future appears somewhat clouded as no traffic information or other statistical data is obtainable, and what has been happening during the first part of 2005 is unknown to the public. In 2004 however, the airline reported a significant loss compared to an industry rare profit in 2003. By the end of 2004 Skyways available funds did not look impressive, and unless the bad performance has been turned around, the company could be heading for potential troubles eventually leading to a call for a cash infusion. Skyways is the only one of the five major airlines not to fly on the more important domestic routes. This could possibly pose a threat if other airlines experiencing grander economies of scale decided to enter into Skyways? turf. Due to lack of financial data, not much can be noted about flynordic, apart from the occasional cries of delight in the media by the CEO. According to the company, flynordic is the fastest growing Swedish operator and generated a 73% cabin factor during the first half of 2005. flynordic has also got a steady cash book to lean upon in the owner Finnair, which purchased the company in 2003. FlyMe looks to be in a very vulnerable position. With a cash burn rate of around SEK10mn a month during the first six months of the year, and with only SEK44mn of funds left at the end of June, its survival is seemingly hanging onto a loose thread. The airline has already raised new funds twice during 2004, but has since commencing its operation never managed to report a profit. Since FlyMe is running out of money fast and most probably not able to raise new funds, it is heading for bankruptcy. It is likely that this takes place before the end of this year.