Wednesday, July 9, 2008

From Zoom to Gloom, which budget carrier will be next?


With soaring fuel prices, a weak economy and poor sales, the Boyle brothers' airline didn't stand a chance. So which carrier will be next to have its wings clipped, asks William Lyons
BARELY a year ago John Boyle was in bullish mood at the launch of new fares for the airline that had promised to revolutionise transatlantic travel. He lambasted British Airways and Virgin for "fleecing passengers for too long" as he and his brother Hugh unveiled a route from London to New York for just £129 each way.

With two hot meals, designated seating and premium upgrades, it aimed to change long-haul air travel and make Scotland a powerhouse in global aviation. A stock market flotation was mooted, valuing the airline at up to £100m, while its summer flight schedule was spectacularly upgraded, offering 40% more seats across the Atlantic.

Not since the days of Sir Freddie Laker's Skytrain in the late 1970s had the established transatlantic carriers faced such a threat. Back then, despite huge support from the public and the Prime Minister, it took five years and an aggressive price dropping exercise for the competition to drive Laker out. But while British Airways, Pan Am, TWA and Lufthansa were said to have met to plot Laker's downfall, with Zoom they didn't have to: a soaring fuel bill did it for them.

As with other transatlantic carries such as MaxJet, Eos and Silverjet, Zoom's problems lay primarily with the price of oil, which last year added more than £27m to Zoom's fuel bill.

A combination of soaring oil prices, poor sales and a weak economy has precipitated the worst crisis to affect the global airline industry since the aftermath of the September 11 attacks. This year more than 27 airlines have gone bankrupt. By Thursday afternoon, with a last minute financial lifeline collapsing, the Boyle brothers had no option but to cancel all flights and begin bankruptcy proceedings, stranding passengers at several airports. The tally of failed airlines had just increased by one.

In a hastily worded statement the brothers said: "We deeply regret the fact that we have been forced to cease all Zoom operations. It is a tragic day for our passengers and more than 600 staff. We are desperately sorry for the inconvenience that this will cause passengers and those who have booked flights."

But as hundreds of passengers were left stranded, forced to pay thousands of pounds for alternative flights or to cancel their dream holiday, there was no crowing from the big airlines led by British Airways and Virgin Atlantic at the failure of this latest upstart attempting to seek to carve out a living in this lucrative but highly competitive route. Against a backdrop described as the "perfect storm", potentially more destructive "than our recent battles with all the Horsemen of the Apocalypse combined", many analysts are now speculating not if it will happen again but who will be next.

"It's going to be a difficult winter," says Wyn Ellis, aviation analyst at Numis Securities."The summer period tends to be quite good. If you can't make money in the summer you have a real problem but as we go into the winter demand naturally declines and it becomes much more difficult to make money."

It is a view echoed by aviation expert and author of The World's Major Airlines, David Wragg. "There will be several more collapses this year," he says. "While people concentrate on the big holiday airlines and national carriers the companies that are going to have real problems in the coming winter are the smaller airlines such as Eastern Airways and Loganair, who operate older, less fuel-efficient and smaller aircraft.

"Rising fuel prices have actually brought them to their knees. An airline such as Zoom does operate on fairly tight margins and the business is seasonal in contrast to cargo and business travel."

Zoom Airlines was formed seven years ago when Hugh Boyle, who had sold his tour business Direct Holidays to Airtours for £84m, moved to Canada and found a gap in the market for low cost, direct sale leisure travel.

He formed Go Travel Direct, the first such Canadian tour operator. But travel agents saw it as a threat and pressured airlines to boycott his clients. In response he and John launched their own airline, Zoom, based in Ottawa.

Initially its plan was to fly Canadians down to the US sunbelt and the Caribbean on winter package tours sold by Go Travel Direct. But the brothers still retained their links with UK tour operators, who were keen to seek out cheaper transatlantic flights. In 2004 Zoom launched a service between major Canadian and UK cities plus Paris. It was an unexpected success and led to them developing leisure routes between the UK and Canada. To some extent the airline copied the low-cost model with all bookings online or through call centres, keeping distribution costs low.

As the transatlantic traffic grew, a subsidiary company, Zoom Airlines Ltd, was established at Gatwick as a UK-regulated company to launch the UK-US routes. Zoom Airlines Inc remains registered in Ottawa as a Canadian carrier, regulated by the Canadian aviation authorities. International air traffic rights are closely tied to the nationality of airlines under the terms of bilateral air services treaties. As majority shareholder, Hugh Boyle was able to own both a UK and a Canadian airline by dint of holding dual UK and Canadian passports.

In 2006 the duo struck a £5.7m deal with Bank of Scotland Growth Equity to open up longer-haul routes from London to the US, Mexico and Bermuda. The move was heralded as giving them a head start on other airlines before the transatlantic open-skies agreement came into force. Momentum was with the airline. In August 2007, as revealed in Scotland on Sunday, brokers Collins Stewart and Panmure Gordon were asked by the management to explore the possibility of a flotation with a starting price of around £85m.

One City source said: "The timing was bad. No sooner had brokers been approached then the oil price started to move and the market began to get jittery. A flotation in this environment just wasn't a possibility."

With the oil price soaring to above $100 a barrel aviation conditions worsened, with airlines collapsing to the tune of two a month.

Last Wednesday afternoon, as one of Zoom's seven aircrafts landed at Calgary airport from London, it became clear the financial situation had reached crisis point. As the 180 passengers disembarked Aercap, the airlines leasing company, impound the Boeing 767 because of unpaid charges. A WestJet airline was summoned to take the remaining travellers on to Vancouver while Zoom executives quickly announced that they would be filing for creditor protection, allowing them to keep operating while the company went into administration.

It wasn't enough. News flooded through the industry. Creditors, suppliers and customers became more and more nervous. At Glasgow another jet was blocked as the Civil Aviation Authority demanded its fees. In Cardiff suppliers refused to refuel unless they were paid in cash.

By late Thursday afternoon the situation had become hopeless. As the administrators were contacted it became clear to Zoom's senior management that it could no longer afford to fly. At around 7pm Zoom collapsed, owing millions of pounds in fuel costs, leasing charges, airport fees and other supplies.

This morning, as Hugh Boyle begins another round of discussions with various parties interested in the airline, the situation looks bleak.

"We have to be realistic. The airline's planes are grounded with no immediate prospect of them flying again," he said. "But we will continue and do our best to examine every possible option.

"We are leaving no stone unturned. It is a bleak situation and I will be talking to people who have contacted us to at least discuss any possibilities regarding the business. Myself and the company will continue to liaise with other airlines to ensure that everything will be done for people to find alternative flights. This week administrators will be appointed in Canada and the UK and we will take things from there.

"I would just like to reassure passengers that everything possible was done on Thursday to keep our aircraft in the air but it proved ultimately impossible as the reaction to our position became even more intense.

"We certainly believed up until the last couple of hours that we could continue operations within the status of creditor protection, which the airline industry on both sides of the Atlantic has done on a regular basis. The domino effect of one aircraft impounded in Canada set in train a series of events that were absolutely unstoppable."

Meanwhile, the aviation industry continues to look over its shoulder to gauge who will be next. Late on Friday night it emerged that troubled Italian airline Alitalia had applied for bankruptcy protection as it tries to agree a deal to ensure its long-term survival.

"It is going to get a lot more complicated for passengers," says Wragg. "What we will see is the emergence of both lower and higher cost airlines. American Airlines have already started to charge people to put baggage in their hold while United is going to start charging economy class passengers for meals on a trial basis between London and Washington.

"The cost of air travel will have to rise and it will not just be start-ups and smaller carriers failing. We are going to see a few of the big, traditional airlines suffering."

The flight to failure

2001 Zoom is founded in Ottawa, Canada, by Scottish millionaires John and Hugh Boyle. Initially its plan is to fly Canadians down to the US sunbelt and the Caribbean on winter package tours sold by the brothers' travel business Go Travel Direct.

2004 Zoom launches its first transatlantic service with flights between major Canadian and British cities plus Paris. Zoom Airlines Ltd is formed in Gatwick for US-UK routes.

2006 The Boyle brothers strike a £5.7m deal with Bank of Scotland Growth Equity to open up longer-haul routes from London to the US, Mexico and Bermuda.

2007 As revealed in Scotland on Sunday, brokers Collins Stewart and Panmure Gordon are asked by the management of Zoom to explore the possibility of a flotation. The plan is for the starting price to be around £85m.

January 2008 At the beginning of January, oil breaks through the landmark $100 a barrel, driven by a slumping dollar, geopolitical instability and worries over a winter fuel supply crunch. The price of aviation fuel soars.

August 28, 2008 Zoom Airlines files for bankruptcy, grounds planes stung by sky-high fuel costs and cancels all flights, leaving hundreds of passengers stranded at airports.

The full article contains 1805 words and appears in Scotland On Sunday newspaper.
Page 1 of 1

* Last Updated: 30 August 2008 2:38 PM
* Source: Scotland On Sunday
* Location: Scotland
* Related Topics: Budget airlines

No comments: