Dublin-based Ryanair said Monday that it is "inevitable" that weaker budget airlines will fold over the coming months as costs rise.
"We think it's certain," said Ryanair CEO Michael O'Leary. "There will be more and larger failures this winter."
Ryanair (RYAAY) is locked in its own fierce battle with unions over pay that has hurt its profits. But smaller and weaker competitors are having a tougher time, with some already collapsing under the weight of rising fuel prices, increased pilot pay and higher borrowing costs.
The Irish carrier said that it stands to benefit from the industry shakeout. It listed rivals that have already run into trouble and alluded to others that may soon buckle under pressure.
"Consolidation will create growth opportunities for Ryanair," it said in a statement.
Headwinds in Europe
Several European airlines have gone bust in recent months.
Swiss airline SkyWork halted operations in August, the same month that Belgium's VLM entered liquidation. In October, Cobalt Air and Primera Air collapsed and Small Planet Airlines said it would restructure its Polish division.
The carriers were smaller than Monarch Airlines and Air Berlin, which failed in 2017. But their demise was still good news for the biggest discount carrier in the region.
"Ryanair has a large number of small bases, which makes their network very flexible," said Daniel Roeska, a senior analyst at Bernstein. "They can react very quickly to changes in the market, especially when small carriers get into trouble."
Pilot shortage
One major factor harming industry profits is intense global competition for experienced pilots.
Boeing estimates that 635,000 new commercial pilots will be needed globally over the next two decades. Demand for new pilots will be highest in Asia, but European airlines will need 118,000 — more than in North America or the Middle East.
Airlines are already offering big money to keep pilots on board.
"It takes some time for the senior pilot supply to catch up," said Roeska. "You cannot make them, they have to fly a lot. It's not something the market can fix overnight."
The problem is especially acute at Ryanair, where staff costs jumped 33% in the first half of the year as the carrier negotiated pay with unions to try to avoid damaging strikes.
Ryanair first recognized unions in December 2017 and has since struck labor agreements with pilots in Ireland and Italy. The airline, which has 13,000 employees, has yet to reach agreements with union officials in key markets such as Spain and Germany.
Fuel prices
Rising fuel costs have put global airlines under even more pressure.
US oil prices have increased by roughly a third over the past year to trade at nearly $70 per barrel. The sharp rise, spurred by US sanctions on Iran, has led to higher jet fuel prices.
The International Air Transport Association, which represents major carriers, said in September that the trend helped push industry profit margins below 8% in the second quarter.
What happens next
Investors — and Ryanair — will be keeping a close watch on smaller European airlines during the winter months.
"Our focus will be on one of the two major Scandinavian airlines," O'Leary said Monday. "We think one or the other of those are the most likely to fail this winter."
The CEO's comment was interpreted as dig at Norwegian Air, which has expanded at a breakneck pace and gained a reputation for carrying passengers across the Atlantic for as little as £135 ($175).
Norwegian has already rebuffed takeover bids this year from British Airways parent IAG (ICAGY), but analysts say that higher costs and rising debt are piling pressure on the airline.
The budget carrier said Monday that its business was sustainable.
"These comments are from the same broken record and have no root in reality," a spokesperson said in a statement. "We're focusing on our business and at this time Mr. O'Leary should focus on Ryanair."
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