Airlines making their first tentative steps towards restart of operations are keen to convince the public that air travel is back.
But making the case will not be easy – or cheap.
Early indications are that many passengers are nervous about boarding an aircraft, especially older travellers. And given that the world is dealing not only with a pandemic but with a recession, customers will be cautious with their money.
Peter Morris, chief economist with consultancy Ascend by Cirium, highlights research that shows forward bookings for summer 2021 to be five times greater than for summer 2020, contrary to what would normally be the case. “The travelling public has consciously or unconsciously written of summer 2020,” he says. “There’s a confidence factor that airlines want to establish… Government advice on social distancing and avoiding travel certainly has an impact.”
It is the pervasive reluctance to fly that Europe’s airlines are looking to reverse, and they plan to do so by dramatically cutting prices.
EasyJet is selling a million seats priced at £29.99 (around $38) as it looks to operate to around half of its 1,022 routes in July and August, although because of reduced frequencies it will only operate 30% of its usual capacity.
Rival budget carrier Ryanair, meanwhile, says it will cut fares by up to 50% to tempt passengers back on board. “Seat sales will be necessary to stimulate demand,” group chief executive Michael O’Leary said during an annual results presentation in mid-May.
Ryanair’s stated aim is to have the lowest fares in the market, despite its suspicion that airlines in receipt of state assistance will engage in below-cost selling in order to hold market share. “Wherever there is below-cost selling, we will price below the below-cost selling,” O’Leary vowed.
Europe’s other low-cost behemoth, Wizz Air, is also slashing prices.
“We are the lowest-cost producer in the industry,” chief executive Jozsef Varadi asserted in early June, “so I think we are in a pretty good position to actually take advantage of this situation post-coronavirus.”
He added: “We also know that consumers tend to downgrade from high-cost to low-cost travel under economic recessionary terms, and again we are in pole position to take advantage of that… We should be getting a lot of customers who are coming down from the legacy carriers who still want to travel but are not prepared to pay the prices that they used to.”
Of course, it is not only the low-cost segment that will be looking to attract passengers: carriers in all parts of the market are cutting prices to stimulate demand.
With business travel likely to be harder hit than leisure or VFR (visiting friends and family) travel, price reductions will have an impact across all segments of the market. Reduced fares at the front of the cabin could entice some leisure passengers – or corporate travellers that would usually book economy or premium economy – into business class, says John Strickland, director of JLS Consulting.
Any company’s natural response to a reduction in demand is to lower prices, but this time airlines are doing so principally not to gain or hold market share, or even to generate profits, as they would during normal times. Rather, the aim is to “kick-start the market”, says Strickland. “The idea is that once the public are used to the idea of flying again and are reassured about the safety of doing so, a quick restart will enable airlines to return to generating profits further down the line, even if it takes a year or more.”
Currently, the level of demand for flying is relatively unknown. Lower prices will enable carriers to attract consumers’ attention, and are characterised by Ascend by Cirium’s Peter Morris as “an attempt to change the dialogue around flying, to restart the industry and get a critical mass”.
Even if slashing ticket prices are successful in terms of filling up aircraft, that may be a bittersweet victory for airlines, however.
Going into peak summer flying season in Europe, carriers would normally have their aircraft full or close to full, making it their most lucrative period of the year and sustaining them through the leaner winter months.
As it stands, with prices likely to be at rock bottom, airlines may need to accept that turning a profit will have to wait.
“If airlines started charging ticket prices at a level to make a profit, with load factors that may be only 40%, they would have to double the fares,” Morris points out, and such pricing would obviously put customers off. “They are damned if they do and damned if they don’t,” he adds. “If they sat tight and flew no flights, eventually they would go bankrupt anyway.”
Given the issues airlines are facing with profitability, the length of time that they can offer discounts will depend on their liquidity.
Even the strongest have seen their debt levels rise during the long months of lockdown. The price war will further pressure their finances as aircraft return to the skies at volume.
Airlines may also find that the economics of flying have changed. Aviation is an economy-of-scale industry, and larger airlines benefit from lower unit costs. The problem, then, is that when demand evaporates, as it has under the pandemic, there is a diseconomy of scale, where carriers suffer from large fixed costs for staff, aircraft and maintenance.
“Understandably, airlines are going to need to stimulate demand through relatively low fares,” said IATA chief economist Brian Pearce on 9 June, but the challenge for profitability is that “non-fuel costs have been rising”.
The importance of addressing these issues, paramount during the grounding, will not evaporate once limited flying resumes. “The pressure on airlines will only increase as we go into winter,” notes Strickland.
Currently, airlines have an immediate need to service debt, while new restrictions will hamper their ability to boost aircraft utilisation, and push up costs.
“Airlines are facing a very tricky restart,” Pearce acknowledges. “If markets strengthen significantly, then airlines will be able to recover their costs – but if not, it’s an unsustainable situation.”
This analysis is written by Jonathan Robins, part of Cirium’s London-based reporting team
