It is easy for airlines today to talk about offering “social distancing” accommodation on board. Blocking middle seats or even sitting passengers every other row is not a problem when load factors hover in the mid-teens, occasionally peaking at 30% for an especially busy flight. But as lock-downs are lifted and demand (slowly) returns the planes will become more crowded. If social distancing demands remain in place at that time IATA executives believe the LCC market could collapse as a financially unsustainable endeavor.
Given razor-thin margins per passengers even before the pandemic-induced market collapse, there is little cushion for empty seats on board. But blocking all middle seats would instantly reduce overall capacity on planes by a third. With a typical break-even load factor hovering above 70% this means that the business model is no longer viable.
Speaking on the weekly COVID-19 briefing on Tuesday, IATA Chief Economist Brian Pearce offered up a grim outlook, “If there are requirements for spacing, for a middle seat to be empty, that would mean load factors on a short-haul flight would be a maximum of 66%… That would have a very negative impact on the economics of short-haul flight.”
IATA Director General Alexandre de Juniac was more blunt in his assessment of the potential impact:
[E]ither you fly at the same [ticket] price and lose enormous amounts of money…or you increase the ticket price by 50% and you are able to fly with minimal profit. If social distancing is imposed cheap travel is over. Voila!
Even worse for these airlines is that increasing the fares probably is not enough.
Ancillary Revenue drives the model
For many of the LCCs ancillary revenue matters more than the base fares. Research from IdeaWorks found nine airlines in 2018 had more than 30% of their revenue from ancillary products rather than base fares. Not surprisingly, these are fit in the U/LCC model.
Just raising fares 50% does not make up for the empty middle seat. Either the base fares must rise more or the ancillary portion must increase along with the base fares to offset the capacity loss.
Dynamic pricing of ancillaries will help to some extent, and that technology is improving and spreading through the industry. But it is not enough.
To induce demand or not??
IATA projects some 40% of travelers will wait at least 6 months after lock down orders are lifted before returning to the skies. That’s bad news for the industry overall but especially bad for the U/LCC market that exists on induced demand from low fares. The idea of fare wars, exceptionally depress pricing to overcome those consumer confidence concerns, is diametrically opposed to the financial needs for airlines to hit profitability.
But they also need revenue in the Summer season if they’re to make it through Winter 2021 and still be in business a year from now. This is a huge challenge for these carriers, even before talking about chances of a pandemic resurgence later in the year.
For a (generally) up-to-date listing of airlines and their operational levels check out this spreadsheet maintained by PaxEx.Aero and other industry experts.
More on COVID-19 and the airlines affected
- Alaska Airlines offers elite bonus earning in face of COVID-19 booking weakness
- Massive cuts, uncertain recovery timelines for aviation in the face of COVID-19
- Qantas cuts international 25% through September facing coronavirus-induced demand drop
- Spirit Airlines plans 5% growth reduction for April as COVID-19 hurts demand
- American Airlines slashes schedule, increases flexibility for customer rebookings
- US to block some European visitors
- Two key takeaways from American’s latest schedule cuts
- Regulators suspend slot rules, opening door to deeper airline cuts
- Beyond route cuts, airlines initiate extended suspension of operations
- Gogo looks to ride out coronavirus-related dip in demand
- Trans States Airlines: The first US airline victim of COVID-19
- JetBlue removes 40% of capacity, delays new deliveries as demand drops
- Airlines get a break on coronavirus EC261 comp, looking for more
- Airport lounges shutter as airlines slash capacity
- Will COVID-19 delay the opening of Berlin Brandenburg Airport?
- Qatar Airways plans 75% capacity cut in response to COVID-19
- Emirates, Turkish Airlines slash route networks, ground aircraft
- JetBlue plans additional draw down in service
- Is it time for US airports to start closing terminals??
- Converting to cargo: Putting passenger planes to use in the COVID-19 era
- IATA anticipates recession, slower recovery, as COVID-19 impact drag on
- US carriers cut frequencies, not destinations as they seek federal funding
- JetBlue plans 70%+ cut in April operations
- Cancelled flights, vouchers and the airline cash flow crunch
- Spirit Airlines reportedly cutting 90% of flights
- US airlines cut deep, but not deep enough
- An eerie quiet over New York City: The flights are gone
- Who wants what? How the US airlines are responding with CARES Act funding on the line
- Delta, United extend elite status by a year, adjust other benefits
- DOT adjusts, finalizes airline route requirements for CARES Act funding.
- Lufthansa announces major, permanent fleet restructuring
- Air Canada, Alaska Airlines extend elite status
- Deeper cuts, reprotect options coming for JetBlue
- Air Canada replaces seats with cargo in 777-300ER cabin
- American Airlines extends status, eases qualification
- A new take on amenity kits in the COVID-19 era
- COVID crushing inflight connectivity: Part 1
- Stuck in the past, DOT botches its CARES Act implementation
- DOT grants exemptions to Delta, Alaska Airlines, Hawaiian Airlines under CARES Act obligations
- Introducing yin-yang seating for economy class
- Inflight social distancing will kill short-haul LCC travel: IATA
- Gogo furloughs 60% of workforce, applies for CARES Act support
- COVID crushing inflight connectivity: Part 2
- De Havilland, Air Canada Cargo partner on Dash 8-400 cargo conversion
- JetBlue plans new route network for CARES Act compliance
- Spirit Airlines running triangle routes to meet CARES Act requirements
- Sun Country wins big as United, Frontier lose in latest CARES Act ruling
- Frontier Airlines pushes new route plan for CARES Act compliance
- Argentina plans to restart flights in September 2020
- Spirit Airlines asks DOT again to drop destinations
- Delta Flight Products, TechOps develop isolation pod for COVID-19 military transport
- JetBlue aims to drop 16 "major hub" destinations from its network
- Allegiant scores leniency from DOT in CARES Act obligations
- Panasonic Avionics implements furloughs to address slowing business
- American, Delta confirm accelerated fleet retirements
- Airbus aims to ease "COVID Combi" temporary freighter conversions
- The Weekly Wrap: FlightPlan, personal screening and more!
- United’s long-haul operations focus on a new "workhorse"
- United plans touchless bag tag kiosks
- Temperature scans in, 767s out for Air Canada, Rouge
- JetBlue, Spirit score exemptions to drop service at major US airports
- IATA recommends against blocked middle seats, favors "layered" protections
- United plans to resume (cargo for now) Hong Kong-Singapore service
- JetBlue suspends six cities through June
- Project Wingman USA Opens Lounges for Frontline Healthcare Heroes at Two Major New York City Hospitals
- Cape Air’s ugly April stats (and some possible good news for May)
- Fighting for the middle: A pandemic seating shift
- Avianca declares bankruptcy, seeks protection in restructuring
- United raises ire in cutting hours for salaried employees
- DOT further relaxes airline CARES Act obligations
- Allegiant sees quick recovery on the horizon
- Delta drops 777 fleet as coronavirus cuts continue
- JetBlue offers free TrueBlue Mosaic status, plus a year extension
- United faces lawsuit over M&A employees pay cut
- Optimism on the horizon: The Weekly Wrap 15 May 2020
- Beached Whale: A380’s future turns more bleak
- TSA implementing lower-touch screening protocols
- Volotea plans for growth into a COVID-affected Summer
- Health passports in our future: The Weekly Wrap
- LATAM seeks US bankruptcy protection, plans to continue operations
- JetBlue plans return of international markets in June