The past few months have been particularly dramatic for the airline industry. There have been a number of airline failures, in particular Spanair and Malev, where the owners decided sustaining the unsustainable was no longer an option, with no new investors emerging and the retrenchment of AirAsia X.

The significant ordering level by airlines in the low-cost segment in 2011 has continued into 2012, and it seems ambition may get the better of reality.

At the same time, manufacturers continue to insist there are no problems regarding funding of future deliveries, which gives rise to the question: what role will they play in a more challenging market for aircraft finance?

For now our focus is on some of the developments in the low-cost market.

As regular readers know, we do not particularly like the term low-cost airline - clearly cost matters, including having the lowest possible price - but at the same time it is a necessary phrase to attract passengers who don't want to pay top-dollar.

Fixations over terminology are never far from the surface in the aviation industry. During a recent presentation at the Aviation Club in London, EasyJet chief executive Carolyn McCall repeated her view that she wants the airline to be regarded as offering best value, rather than be defined as a low-cost carrier.

One of the many messages from EasyJet's recent investor day was that in communicating its value proposition, it was able to show the airline was not only cheaper than its competitors, but it also flew to and from principal airports. Although there are, of course, a number of these where they are not represented.

In Europe, the early part of the last decade was characterised by Ryanair and EasyJet's acceleration into a new market opportunity - the feature of the latter part of that decade and this one has been what is best described as convergence.

There has been a structural behavioural shift in short-haul travel in Europe, meaning that where airlines are competing for the same traffic, the only difference from 10 years ago is that this is now more pronounced and obvious. About 18% of EasyJet's passengers fly business, with up to 40% on some routes, while Vueling describes its front-row seats as "business class without the curtain".

The so-called "copy and improve" strategy approach has a long history, and in the case of airlines we would add the additional step of having to adapt a strategy to local market conditions. Similarly, the theory of evolution - in the simplest terms - suggests you adapt or die.

There is, however, no escape from the fact that no matter how high or low your costs, the difference between success and failure is your ability to attract a sufficient volume of traffic that offers you the necessary structure of traffic. In particular, traffic that pays the fares you need to cover your costs and generate a return.

In the low-cost, long-haul segment, the retrenchment of AirAsia X from Europe and India poses some interesting questions about the model.

No matter how much management suggests origin economies are to blame - as the economies were weak before AirAsia X launched its services - this provides a clear indication that, among other things, airlines need to reach the corporate market and low-yield traffic is not the route to profitability.

Of course traffic volume alone may be insufficient, even in an under-served market. By applying our suite of development indicators we can identify what appears to be significant market potential in a large number of countries in the world.

The problem comes when you look at what the achievable fare might be and, in particular, its relationship with the competing mode for the journey. If, to make the airline economics work, it has to be 15 to 20 times the cost of the alternative, it is unlikely to open the market.

All of this raises some questions about the nature of future growth, and with it, the demand particularly for narrowbody aircraft in some regions. Inevitably there may be fewer survivors, let alone winners, in the future than there have been in the past. Ordering aircraft is the easy bit. Often the problems are finding affordable finance and profitably deploying the aircraft.

With airline results and cash flow under greater pressure in 2012 as fuel prices continue to rise, there are indeed challenges ahead. Low-cost carriers will not be immune from this and it is reasonable to expect failures in this segment too.

Another scenario seems likely: that as we move to the latter part of 2012 and into 2013, there may be some real aircraft bargains about. Many wait for these opportunities to emerge.

Source: Airline Business