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.

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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.

“It's a decision we're taking about putting people over profits, absolutely,” stated Bastian.

Emirates, the flag carrier of Dubai, went all-in on customer confidence measures. The airline announced that it would cover the medical expenses and quarantine costs, up to $176,000 and $117 daily for up to 14 days, respectively.

“Emirates is proud to lead the way in boosting confidence for international travel. We know people are yearning to fly as borders around the world gradually re-open, but they are seeking flexibility and assurances should something unforeseen happen during their travel,” stated Emirates Group Chairman and CEO Ahmed bin Saeed Al Maktoum.

The offer applies to all customers, regardless of their destination or if they were traveling with an economy class ticket.

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Emirates announced that it will resume flights to Nairobi, Baghdad and Basra, growing its passenger network to 67 destinations in August 2020.
 

Lower airfares

“I am convinced to get Europe air travel moving again is with lower fares and price diminution,” stated the CEO of Ryanair Michael O’Leary. The Irish low-cost carrier announced it finished Q1 FY2021 with a net loss of $216 million (€185 million). Instead of an expected 149 million passengers, Ryanair now expects to carry 60 million travelers, an ambitious target according to O’Leary.

“That traffic will only be delivered on the back of lower airfares,” added the Irish executive.

The airline’s load factors, on average, were at 61%. The low-cost carrier has not blocked its middle seats in order to improve passenger confidence. In May 2020, O’Leary called the idea “idiotic”, and if the Irish government were to mandate such a rule, they would have to pay for the empty seat or Ryanair would not fly.

"We can't make money on 66% load factors," added O’Leary.

Wizz Air, another European low-cost carrier, has expanded massively, relative to the current crisis. Despite the period marking “one of the most challenging times in the history of aviation,” according to the carrier’s CEO József Váradi, Wizz Air opened seven new bases and added aircraft to three bases across Europe. In total, the airline re-based 22 aircraft, launching more than 200 new routes. Much like its competitor Ryanair, the Hungary-based airline tries to stimulate traffic with sales and cheap tickets.

But its bet to expand during the unprecedented pandemic is still one-of-a-kind. Whether it will come to fruition, only time will tell. Its most recently announced financial results of Q1 FY2021 indicated a negligible loss of $66.5 million (€56.7 million), a pleasantly surprising result amidst the multi-million and billion losses that other airlines have suffered throughout the same quarter.

At the end of the day, however, pretty much all airlines around the world have enacted measures in order to improve passenger confidence measures. Mandatory masks on board, limited interaction with the crew, changing boarding procedures, the list goes on and on. The main difference is in which direction a company takes its next step towards. Whether that would be the very extra step of Emirates’ covering a passenger’s expenses or the path of stimulating demand via low prices, only time will tell who was right or who was wrong.

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Wizz Air is facing criticism from its unions over the way it has handled its employee situation when it fired almost 20% of its total workforce and is now allowing the redundant crew members to apply and go through the same recruitment process as fresh candidates.