Cost versus confidence: will cheap tickets drive travel demand?

The aviation industry, like never before, is in limbo. The maze that was put in front of various airline executives has still not been solved, as estimates on when the record-breaking 2019 travel numbers would return get pushed back and back. But how the industry can stimulate the demand for travel to move at least an inch remains at the center of the maze. A wrong turn can backfire massively and exacerbate the pain of the current crisis, tangling a carrier’s feet in a hedge that might never let go.

The crisis calls for innovative ways to navigate it. For example, Frontier Airlines, a United States-based low-cost carrier, introduced a service that allowed customers to buy out the middle seat starting at $39 on May 5, 2020. Two days later, the company changed its tune after it faced a fair share of backlash, including letters from U.S. lawmakers.

“We recognize the concerns raised that we are profiting from safety and this was never our intent. We simply wanted to provide our customers with an option for more space,” stated Frontier Airlines’ chief executive officer (CEO) Barry Biffle. Yet when the low-cost carrier announced the option, Biffle told CNBC that the sale of the middle seat is “to put people’s minds at ease.”

Free-falling load factors

Blocking out the middle seat, nevertheless, is a painful venture, as airlines were forced to scale down and in turn, reduce the scale of their economies. Parking aircraft on the ground puts a lot of pressure on companies, as these assets still require service and lease payments – yet do not generate any profit.

At the end of July 2020, 40% of all passenger aircraft were stored, according to ch-aviation data.

While that is an improvement over the 59% seen in April 2020, demand for air travel has remained weak. With more capacity introduced into the market, airlines hoped to also welcome more customers. Yet enthusiasm for boarding an aircraft remains low, as global Revenue Passenger Kilometers (RPK) fell by 86.5% in June 2020 compared to the same month a year prior. The average load factor, meanwhile, was recorded as 57.6%, meaning aircraft were flying with a third of their seats empty, as showcased by International Air Transport Association (IATA) data.

After a worse than expected June 2020, the International Air Traffic Association (IATA) revised its outlook for the aviation industry, forecasting a return to 2019 levels only in 2024.

For airlines, getting back some of that demand is crucial in order to minimize their cash burn. Whether it would be just a fraction of last year’s levels, airlines desperately need for demand to come back. Delta Air Lines’ CEO Ed Bastian told NPR that the airline is “flying today somewhere about 25% of the schedule that we did last summer. We'll need another 10 to 20 points of demand over the next six months to get closer to that break-even level on cash flow.”

Customer confidence is a priority

But Bastian noted that even a slight recovery depends on the path the virus will involuntarily choose to go towards, and subsequently, how confident will passengers feel about flying. Delta Air Line’s CEO also highlighted that it will continue to block the middle seat: if the average load factor reaches 60%, it will add more flights, rather than fill the flights with more people.