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
- Frontier, Mobile bicker over flights to Orlando
- US retaliates against China, blocking all flights
- China blinks, US to back down on flight ban
- ATPCO moves to ease ticketing changes for airlines worldwide
- Inflight magazines are not dead yet: The Weekly Wrap–5 June 2020
- From pre-flight massages to COVID-19 testing: XpresSpa pivots to XpresCheck at JFK
- GermFalcon to take flight as Honeywell UV Cabin System
- Allegiant driving passenger traffic recovery
- Air travel is bouncing back: Can the trend hold??
- Masks Matter: US carriers plan more enforcement for on-board behavior
- JetBlue plans to outsource airport operations at (more) smaller destinations
- Norwegian set to restart European services from 1 July
- Jilted travelers get aggressive in seeking airline refund enforcement from the DOT
- LATAM Argentina, LEVEL Europe face bankruptcy
- Air Canada launches half-priced Aeroplan rewards in North America
- AirShield proposes curtains of air to separate passengers in flight
- Curing Catering Concerns: The Weekly Wrap–19 June 2020
- A big hint that British Airways will retire its 747s soon
- JetBlue’s crazy summer of new routes
- Air Canada fights back on refund demands, disputes DOT authority
- JetBlue pilots secure no furlough deal through April 2021
- Peek inside the largest converted cargo aircraft flying today
- ZIM Flugsitz seeks insolvency protection
- JetBlue launches trial for Honeywell’s UV Cabin System (f/k/a GermFalcon)
- ExpressJet to wind down operations on 30 September
- Spirit Airlines avoids pilot furloughs in October
- A stalled recovery: Airline traffic retreating
- United Airlines introduces at-airport COVID testing for SFO-Hawaii flights
- AirAsia Japan halts operations
- Cathay Dragon shuttered, 8,500 jobs eliminated
- Researchers link 59 Irish COVID cases to inbound long-haul flight
- A fleet of salvage-priced planes
- Global Eagle charts a new course out of Chapter 11
- United launches pre-flight COVID testing to London
- Allegiant ditches advertising, improves conversions
- Interjet lacks fuel, cancels flights for two days
- Canada plans aviation bailout, so long as passengers get refunds
- JetBlue to stop blocking seats in January
- JetBlue plans additional spending cuts, debt raises into 2021
- Norwegian abandons long-haul operations, refocuses on 737 routes in Europe
- Air Canada, Transat merger approved, with notable conditions attached
- Scammy COVID-safety "certifications" could put industry recovery at risk
- ATPCO adds testing, vaccine requirements to flight search results
- US DOT puts the squeeze on Hong Kong
- Air France secures €4 billion, (maybe) cedes Orly slots
- Air Canada refunds (finally) coming with government bail-out
- United adds Europe routes in hopes of a recovery
- Finnair adds A330 cargo conversion with Lufthansa Technik, Airbus
- Anti-microbial power outlets set to fly
- Aer Lingus delays Manchester-US service launch
- Air Canada fights back, disputes $25 million DOT fine
- Cathay Pacific giving away "Plane for a Day" in vaccination push
- JetBlue sees only 300 unvaccinated as deadline looms
- Ethiopian, Aero HygenX partner to deploy UV-C cabin disinfection
- Air Canada fined $2 million in DOT settlement
- JetBlue plans February schedule adjustments
- Northern Pacific visits Saipan in search of partners
- Eastern Airlines plans Shanghai flights
- LATAM fined $1 million for COVID refund delays
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What’s wrong with people ? This is not a new permanent way of life and the media needs to stop selling it as such. You are brainwashing people the wrong way. These are temporary measures. Trust me LCC travel will THRIVE. Send me an email and I’ll forward you the message I’ve gotten from last 2 Spirit flights last week saying they were oversold and asking for volunteers. That may be with blocked middle seats but proof people are still choosing LCCs even now.
Seth Miller says
I have absolutely no reason to believe that long-term we will see dramatic changes to the on-board seating or passenger space available. But that’s a long-term thing, driven by more and easier access to testing, better contact tracing and many other factors that are not ready to fly now nor are likely to be this summer. And that does create problems for the LCC industry in the short-term, especially if regulators mandate spacing on board.
As for Spirit, the fact that the carrier rapidly slashed its operations to a tiny shell of what was originally planned likely affects some of the demand shown. But also, the entire US industry is running at ~10-20% load factors right now. I have no reason to believe that Spirit is dramatically above those numbers.
You are a damn retard, which is why I can’t ridicule your stupidity.
Seth Miller says
Thanks for reading.
Every statistic I’ve ever read says that ULCC/LCC have a lower break even load factor than traditional legacy airlines.
NK/F9/G4 are just under 70% to break even. WN/B6 slightly higher, and AA/UA/DL much higher. If the legacies need 75% or more just to break even, they are definitely more hurt by blocking off middle seats if aviation has to go that route.
In previous downturns in aviation both the recession of 2007 and 9/11 the LCCs grew and legacies shrank. This is certainly larger in scale for the industry, but what makes you think it will be different?
Seth Miller says
BELF varies based on both cost and yield. Yes, the U/LCC carriers have lower costs, but also lower yields. And they don’t have premium products that sell at out-sized margins.
Also, look beyond just the USA. There are plenty of LCCs around the globe that are on the brink even with higher LFs. And they’re not going to fill planes at higher fares.
They exist more or less based on induced demand: Get fares cheap enough and people will fly. The math on it is hard to get just right, but if you can fill enough seats at those induced prices it should work out. Raising the fare 50% doesn’t work because the travel is discretionary and the pax won’t show up. That is still a problem with legacy/network carriers, but less so as they tend to attract more business travelers that are less price sensitive.
It is not a perfect split and every airline has a blend of passenger traffic in play, but the trends very much are there.
But if a ULCC breaks even at 68 percent charging the low fares as they historically do and UA breaks even at 75 percent at their fares, who is hurt more when middle seats are blocked off? The airline that can break even at that load or the airline that even at full capacity (Without middle seats) cannot break even?
And when times were good, the legacies were consistently matching fares on common routes, even at a loss. Now that times aren’t good, certainly they won’t be as aggressive defending turf at a loss, will they?
And still wondering why during the last recession when economy was hit hard, how were LCCs/ULCCs able to expand at astronomical rates?I think the figure that I saw from the DOT was close to 50% growth for some of them from 2008-2013.
Seth Miller says
The U/LCCs were definitely still expanding at a faster percentage rate coming into this mess. But also not necessarily as profitable as the larger carriers. The two are not necessarily tied together. JetBlue expanded ASMs 2% more than Delta in 2019. But Delta is 4.5x larger and added 3x more ASMs than JetBlue did in absolute numbers. So which one really grew more??
Also, some of the legacy carriers have rebuilt their cost structures pretty aggressively in recent years. Labor contracts still present challenges, but the spread on costs isn’t quite as bad as it once was.
It comes down to how the airlines might respond to a situation where cabin seating density must be reduced long-term. I don’t think that’s going to happen, but if it does the airlines either lose a lot of money at their existing fare levels or raise fares up and try to offset the reduced capacity. If you’re paying $150 instead of $50 for a seat, the thinking goes, you’ll consider the product and other factors more than just taking whatever is on offer because it is cheap. And airlines with premium products are slightly better suited to capture the higher yields, albeit at higher costs.
I don’t believe that, long term, we’re going to fly with the blocked seats. I don’t really think all that much is going to change on board. But there is a risk to the constant availability of low fares. And those fares are what drive the growth, not necessarily profitability at those fare levels. Especially outside the USA.
I don’t think blocked seats are a long term problem, either.
History would definitely favor LCC in these situations though.
Another thing to consider is that AA/UA/UA are all saying that they’ll be smaller carriers when all is said and done. Sure, you’ll get some early retirements to reduce the workforce (Which are pretty expensive) but the general consensus is that we are still going to see furloughs to the workforce on Oct 1st once the CARES act allows it.
LCCs are almost solely single fleet type which makes it cheaper and easier to reduce workforce, if needed.
The legacy airlines have many different fleet types, and workforce reduction of what is by far the most expensive labor group, the pilots, will have to be done contractually, which is going to be based on seniority.
The senior pilots who aren’t going to see a furlough are making far more money, and are flying the aircraft least likely to be needed in a post covid19 world – large widebody aircraft. The narrowbody aircraft (B737/A320) which will be the most valuable for the types of routes and loads being flown are being piloted mostly by the junior pilots who may be displaced. It is an absolute mess and training and scheduling alone will be a massive cost and hindrance.
For these reasons, I tend to disagree with your opinion.
But honestly, I have no idea, nor does anyone at this point. Just throwing a different view out there for constructive criticism. It could absolutely go either way IMO.