1. With a low aircraft utility, airlines eagers to regain capacity.
2. Business confidence recover in a delayed pattern, airlines would lower the fare to stimulate the demand, sell more with lower per-unit profit.
3. If social distancing applies, airlines should increase the fair by 43% to 54% to reach break-even.
With a low aircraft utility, airlines eagers to regain capacity.
Due to the Pandemic and recession, airlines are over capacity currently. From March to May, more than half of the fleet was grounded and sealed globally. Compared to parking at ramp, sealed planes need 5-7 day to unseal with a lower holding cost. Although it will lower the variable cost, fixed cost of deprecation still as usual. If the plane was leased, the rent also need to be paid. Usually, the billing period for those is short, usually monthly, which sucks up the cash flow even more.
Thus, airlines want to utilize their aircraft more frequent. A short analysis on the grounded aircrafts by region can show some trends. As the data’s attributes reveals, it should be weighted for further calculations.
RS: Regional Share, derive from IATA data.
RGS: Regional Grounded Share, derive from IATA data.
S-Value: Severity of grounded, equals to RGS/RS, higher S-Value shows higher severity. 100% as the global average.
Note S-Value is a relative variable that only use to grade after weighted, with no meaning solely on one value.
According to data, Europe, Latin America, North America and Africa has a higher than average “S-Value”. Europe and American market have a larger share, and the confidence is still in a low land, which lower the global average. As the largest market, Asian Pacific market now have a smaller S-Value. That can attribute to the steady control and pace of recovery.
The fleet structure may change, causing by airline’s cash shortage. The first impact is the retirement of aged aircraft. The buy-in price for aircrafts is high, so airlines usually exploit the aircraft to maximum life cycle for a lower average fixed cost. Take Delta’s MD-88 and KLM’s 744 for an example, both have been in fleet for more than 20 years, but the maintain cost is high. The over capacity will last for “at least five years”, according to American Airlines Analyst. Thus, it will be wise to get older fleet retire for the maintenance cost will be even higher.
Another trend is the “leaseback” of aircrafts, which means an airline sell a plane to leasing company and then lease the very same aircraft back. This will provide airlines imminent cash surge, but decrease the future profitability. Hainan airlines has done this a few weeks ago, and there’s abundant evidence that the trend will keep prevalent.
Business confidence recover in a delayed pattern, Low Fare strategy prevails
The data consent with previous point in Martinview. The column represents new confirmed cases, the line shows the change of booking. Compared from western market, Chinese market gets slow recovery. Starting from mid-March, the periodic trends are observed once more. Due to the recovery of business travel, business day has a higher booking than weekend, as the leisure demand still not rebounded.
According from the graph above depicts Chinese domestic market, one can find that air fare decreases when market reopens, from 143 to 80 and hold still. This reveals the low confidence and airline’s “low price” strategy of stimulation. It is reasonable in short run as airlines want to utilize fleets more frequently to lower average fixed cost, and with a toboggan in jet fuel price.
Social distancing: a solution viable in short run
As “social distancing” becomes a prevalent part, people believe a 1-1.5m distance will prevent the spread of virus. Some “Social Distancing” method of selling is discussed frequently. From a theoretical analysis, IATA gives a quantitative rejection in its prospect, but consent it may be useful in short run.
In the model, both narrow and wide body aircraft will experience a sharp decline in capacity per flight. Narrow body with 3-3 layout will loss 38% capacity and a 50% increase in per seat cost. Wide body with 3-4-3 layout loss 40% capacity with a 67% increase in per seat cost. For 2-2 layout, the per seat cost doubled with a 50% loss in capacity.
Weighted the load factor by numbers, a total 38% decrease in capacity is observed. For a typical airline sells every seat (62%) by social distancing, it’s almost impossible to breakeven: only 2 out of 122 done that in 2019. Hence, the conclusion is not positive: in current situation, most airlines can’t break even without increase air fare.
If airlines want to breakeven in 65% ASK, 85% occupancy rate, the air fare must rise for 43%-54%. The highest increment is in Asian Pacific market and the lowest in North America. The difference rate in increment shows indirective that North America market has a higher profitability now, without the consideration of fleet structure.
It seems the social distancing method will severely decrease the profitability of airlines. Whereas in the short run, some imminent advantages are clearly seen. The variable cost currently is much lower than “usual”, with a toboggan in fuel price. As covered in Part 1, now most airlines’ fleet are partially or even fully grounded, and will not be fully recover in the short run. Hence, there won’t be a shortage in capacity (statistically speaking, ASK).
More importantly, consider the social distancing as a type of service. Similar to “Multi Seat” ancillary service, but it is mandatory, not ancillary. It can bring a sense of safety customers, which will doubtlessly surge the confidence, accordance to airlines’ short run goal. Although the higher per-passenger cost may skyrocket, but those unique benefit worth a try. But in long run, as everything return to normal, this won’t work as the model has such a high cost.
In short, airlines are planning to increase flight execute rate and retire aged fleet to get a higher block hour. As they are facing liquidity issue, some leaseback is projected to happen. In order to increase RPK, it is wise for airlines to lower air fare in short run for filling the increasing ASK. About social distancing, it may work in short run, as the Pandemic shape the market in an unconventional way, but in long run, the higher-than-ever cost and low load factor will not be a good business model.
Pearce, Brain.(2020. May.5th). Cost of air travel once restrictions start to lift. IATA Economics.