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Why cheap flights are NOT going away, despite what you may read

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Is social distancing on aircraft going to mean the end of cheap air travel?  If you believe certain travel and media figures in recent days, the answer is undoubtedly yes.

We shouldn’t necessary expect travel or indeed newspaper professionals to have a strong grounding in economics.  However, some recent thinking has shown that even concepts such as supply and demand seem to have passed them by.

This applies even at the top.  Welcome Alexandre de Juniac, CEO of airline body the International Air Transport Association (IATA).

British Airways BA A380 flying

“If social distancing is imposed, cheap travel is over. Voila” he announced in a well publicised media briefing on Monday.

He bases this on two factors:

  • the need to ‘neutralise’ a third of seats on short and medium haul aircraft
  • a break-even level of 70-72% seats sold

Let’s ignore the most obvious point here.  If break-even at current fare levels is 70-72% and for a couple of years you can only sell 66% of seats, you’re nearly there already.

Break-even isn’t the same as making huge profits, of course, but I think most airlines will settle for a couple of years of break-even.

Let’s also ignore the fact that keeping the middle seat empty isn’t going to make much difference, based on the SARS case I wrote about yesterday that led to five deaths from a single flight.  Michael O’Leary of Ryanair agrees on this point.

There is a fundamental failure to understand airline economics

The following example is how most people are thinking about the airline industry.  These numbers are roughly accurate – the average easyJet one way fare is £50 plus ancilliary revenue:

‘easyJet sells 171 seats per flight (92% load factor) at an average of £75 each including baggage and seat fees, for a total of £12,825.  If it cannot sell the middle seat, revenue will fall to £9,300 (124 seats x £75) and this is not profitable.  Fares will therefore rise to (£12,825 / 124) £103 to compensate.’

This is how the world of selling a ‘one price’ product works, and even then it only applies when selling something which people must buy and cannot substitute for a cheaper alternative.

In the real world, there are very few products like this.  It certainly isn’t how airline seats work.

In reality, easyJet would sell its flights like this, assuming 180 seats sold:

  • 30 seats sold at £35
  • 30 seats sold at £45
  • 30 seats sold at £60
  • 30 seats sold at £75
  • 30 seats sold at £105
  • 30 seats sold at £130

…. for an average fare of £75.

Cheap flights are not going away despite coronavirus

With 60 seats removed from sale, it is the cheapest 60 seats which disappear.  easyJet will start selling the flight at £60 including ancilliaries and not at £35.  The 60 people who are not prepared to pay £60 will no longer be flying.

Let’s look at the revenue again.

With all 180 seats sold using the distribution above, revenue is £13,500.

If you don’t sell the 30 seats @ £35 and the 30 seats @ £45, to keep occupancy to 120 seats, your revenue is still £11,100.

You have emptied 33% of your seats but only sacrificed 18% of your revenue.

Supply and demand works both ways

As you can see above, you can empty 1/3rd of your seats without losing 1/3rd of your revenue.  You also are not putting up prices for anyone except the 60 people who previously expected to pay £35 or £45 all-in and will now choose not to fly.

For 2/3rd of passengers, fares have not gone up.

Let’s look at another reason why fares won’t go up.

Aircraft are a fixed cost.  You are paying the lease, or the loan, irrespective of whether it flies or not.

Irrespective of your fixed costs, you operate the asset as long as your marginal costs are covered.  Let’s assume the apportioned lease cost for an aircraft for a flight is 100 units and the marginal costs of crew, fuel, airport charges etc are 35 units.

You might think at first that is isn’t worth flying unless you get 135 units in fare revenue.  Not true.  Because you are paying 100 units for the aircraft regardless of whether it flies or not, airlines will operate aircraft as long as the fare revenue is higher than 35 units.

As long as enough tickets are sold to pay for the VARIABLE costs of fuel (Brent Crude is now $20 vs $65 for most of last year), crew etc, then it makes sense to put more aircraft in the air.

The flight is at least making a small contribution to the 100 units fixed costs of the aircraft, and so reducing losses.  This means that airlines will put as many aircraft back in the skies as quickly as they can, and the more aircraft that are in the air, the lower fares will be.

We will, of course, see some airlines scrapping older aircraft such as Virgin’s A340s and BA’s Boeing 747s.  This is only a small percentage of their fleets, however, and these aircraft are already depreciated.  The aircraft that remain are newer, far more likely to have leases or debt attached to them, and so need to be in the air.

In the medium term, planes will come to the end of their leases and more capacity could be taken out of the market.  By this point, however, we should be back to 2019 levels of travel and it won’t be necessary.

Is ‘cheap’ travel over?

Not when you look at the numbers like this.

Of course, if by ‘cheap’ you mean the £5 Ryanair flight I took to Porto in February then, yes, that’s over.  Ryanair won’t be selling £5 seats now to guarantee that it fills every seat because – despite the Michael O’Leary quote above – it won’t want to.  It is more likely that Ryanair adds an option to guarantee an empty seat next to you, for an additional fee of course.

Similarly, those £35 and £45 easyJet seats in our example above are gone.

This isn’t ‘cheap’ travel though.  This is just seat-filling promotional activity.

If it turns out that easyJet won’t be selling any seats for less than £60 one-way in the future, I don’t call that the end of ‘cheap’ travel.  £125 return to fly to Europe – on a $42 million aircraft, which is what easyJet is paying for its next batch of deliveries – is not, by any stretch of the imagination, expensive.

When I was growing up, even flying to Paris was outside the dreams of my parents.  For a family of four, very much on the average British wage, it simply wasn’t even a consideration in the late 1970s and early 1980s, pre easyJet.

It’s worth remember that it has always cost £2,000 for four economy seats to a European ski resort over February half term, and anyone who has flown to European beach resorts in August will know that you were paying similar silly prices.  This wasn’t ‘cheap’ travel in the first place and I don’t see those prices getting much higher.

If we end up back at a point where a family of four has to pay £2,000 to fly to Berlin for a weekend break in rainy November then I will happily admit that we are at the end of ‘cheap’ air travel.  I don’t see that happening, however, and I think the economists would agree with me.

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Comments (197)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • Dean c says:
    23 Apr23 April 08:11

    If you’re travelling as a family of 3 who live together then you don’t need the middle seat blocking and on lots of routes planes are full of families travelling together.

  • Marcw says:
    23 Apr23 April 08:21

    Total BS. Airlines are pricetakers. They will charge whatever to fill their planes. Consumers won’t pay more than pre-Covid19. Keep this comment.

    • Yorkieflyer says:
      23 Apr23 April 08:38

      Totally agree, the article ignores the Demand part of Supply and Demand

    • AB says:
      23 Apr23 April 08:51

      the article is not BS – and your comment is either incorrect or meaningless (not precise enough to tell which)

      • marcw says:
        23 Apr23 April 09:14

        Yes it is. It’s very basic and it doesn’t work like that (it’s WAY more complex – and each airline has their own method). Also, difference between cheap travel and promotional filling fares? LOL. All BS. Cheap is cheap when it’s cheap.
        And finally, airlines are pricetakers NOT pricemakers. In case you don’t know what that means… airlines sell tickets at a price consumers are happy paying for. If they don’t do it – e.g. they set the prices – they won’t fill their seats.

        • Rob says:
          23 Apr23 April 09:25

          But that price is different for every customer, on a scale (as per our example) of £150 to £1 for a one-way. All you are doing is drawing a line at 120 passengers, and so chopping out the 60 who are paying peanuts and almost certainly not even covering marginal costs – my £5 Porto ticket doesn’t even cover APD. Ryanair lost at least £20 on that on APD and Stansted charges alone. The scale therefore becomes, say, £150 to £60, which is enough to fill 120 seats.

          Airlines ARE pricemakers to a certain extent because there is no alternative if people want to travel, which we know they do. IF there wasn’t a glut of aircraft sitting around, airlines COULD push up pricing. Customers would need to decide what was more important – a flight or a night in the pub. They could no longer do both. The only thing stopping this is the supply of planes which need paying for.

          Another discussion is about total trip cost. Hotel rooms are likely to be substantially cheaper for a while. Since most flights also involve a hotel, airlines could increase flight costs WITHOUT impacting demand IF the traveller realised that their total trip cost would be unchanged. The £50 extra they were paying for the flight will be offset by a £50 hotel saving. Flight pricing does not exist in a vacuum even though airlines believe it does (although Ryanair eventually realised that people didn’t want to pay £5 to fly to Luebeck and then spend 2 hours on a bus to Hamburg vs paying £20 to fly direct.)

          (The reverse side of this discussion, by the way, is why BA should not have been adding extra seats to its planes. If you can sell 170 seats at between £150 and £30, you can only sell 186 if the additional 16 are priced below £30. The additional revenue is very small and you are trading it off against tighter legroom for the other 170.)

          • marcw says:
            23 Apr23 April 09:47

            I disagree. You make the (wrong) assumption that only the cheap fare paying customers will stop flying. Second, the passengers that will carry on flying are the frequent travellers (by that, I don’t mean the Silver/Gold BAEC members that fly QR business). I refer to passengers that actually fly frequently: they know the market and know how much they had been paying for their flights. They won’t pay whatever the airline charges – they will pay whatever they consider OK.
            No, by default, airlines are pricetakers. Airlines can be pricemakers only if the market allows it (no competition or where demand is way above the offer).

            Well, hold my beer. But BA will be adding more seats to their fleets, especially their LH fleet. That’s the right decision.

            Anyway, it doesn’t matter. We don’t run airlines, so we just have divergent opinions.

  • Cheshire Pete says:
    23 Apr23 April 08:33

    EasyJet only recently as yesterday sent me an email advertising flights from 99p, so not sure where the £60 base point comes from.

    I think the biggest change yet to come when things get back to normal is consumer confidence in ploughing money into airlines/travel companies early. The dreadful way almost all of them have held back refunding will sit in people’s minds for a long time to come. I think they’ve all underestimated how in the future this will is going to affect cash flow from advanced bookings.

    To save perhaps a small percentage why would anyone now pay 12 months or even 3 or 6 months in advance to these companies after they were treated. I think people will more and more think last minute deals, ie only weeks ahead, and things like small deposits till a few weeks ahead.

    They really are going to get a sting in the rear end regarding their antics. In my opinion naturally!

    • Brian says:
      23 Apr23 April 08:52

      “EasyJet only recently as yesterday sent me an email advertising flights from 99p, so not sure where the £60 base point comes from.”

      I’d say that’s a short term cashflow play rather long term profitability, which is what the article is analysing.

    • MrHandBaggageOnly says:
      23 Apr23 April 12:00

      Not quite 99p flights… The email title was ‘Easter 2021 flights now available – bags only 99p’. That said, you can still get one way flights on the EasyJet website from £20.99, which is pretty good. If only we knew when we could get on a plane again I’d be booking!

    • Lady London says:
      23 Apr23 April 12:30

      No they didn’t send you an email with 99p seats @Cheshire Pete. You might want to check it again. Only Ryanair does that and not for a very long while.

  • jimA says:
    23 Apr23 April 08:39

    As noted Families travelling together dont need social distancing So EasyJet could offer buy two get one free they would still make on baggage charges etc

  • David says:
    23 Apr23 April 08:44

    “Similarly, those £35 and £45 easyJet seats in our example above are gone.
    This isn’t ‘cheap’ travel though. This is just seat-filling promotional activity.”

    I (normally) do a weekly commute from EDI-LGW, the front 6 rows of the plane are filled with people doing the same – the same faces every week.

    I, and all the other regulars I’ve spoken to buy tickets from our own money rather than expenses (I’m unusual in doing so from my after-tax wages, most of the others are contractors, so IR35 mat have put paid to that anyway) and book months at a time every flight release day at the bottom of the price ladder.

    So for this group of people it most definitely is “cheap” travel!

  • AlexT says:
    23 Apr23 April 08:46

    There’s one point Rob forgot to make – the aircraft that get parked and returned to lessors aren’t all going to get scrapped. Older ones that are close to C or D checks may, but newer ones won’t. Once things go back to normal in a year, there’s an incentive for a newcomer to come to market, pick up a lot of cheap leases on such parked aircraft, and dump capacity on the market at lower prices to mop up price-conscious customers, which is pretty much all of us, to some extent.

    Sure, Airbus will cut A320 production in the short to medium term and won’t be making 60 per month for a while, but the reduction in capacity from such moves and from scrapping old aircraft won’t be enough to eliminate budget travel altogether.

  • Matthew says:
    23 Apr23 April 09:08

    IATA like OPEC are old fashioned believers in monopoly and cartel economic models. They are not interested in the consumer. The sooner they are ignored and the better.
    Things post Covid-19 will be different. I travel regularly, and if I can book in advance I will to get a better fare, but will end up paying what I have to. I agree for some they will still want the cheapest of the cheap, and it is their choice what they will or wont pay. The market will balance itself.

  • Chrish says:
    23 Apr23 April 09:08

    I think most people, especially those on here will soon forget how badly they have been treated,
    apart from the serial moaners (they will always be on here)
    Travel will return (next year though)
    Soon as NHS has got enough face masks, the science will suddenly change and you will be advised to get “Face Masks”,
    The only reason the government are saying face masks are unnecessary, is to make sure the NHS has enough.
    Believe me “get a face mask

    • Erico1875 says:
      23 Apr23 April 09:31

      Same for lockdown etc. Once the NHS have enough beds,ppe and ventilators we will all be let loose. This slow down IMO is only to get the infrastructure ready for mass contamination

      • marcw says:
        23 Apr23 April 09:34

        Not only infrastructure, but importantly, logistics.

      • Qfx says:
        23 Apr23 April 10:08

        The government are still buying in ventilators, and opening up Nightingale hospitals, despite talk of being at/over/in the peak and plenty of capacity.

        On news a few nights ago they graphed infection rates for Austria and Czech Republic, marking on when mask use became a requirement and it showed a noticeable impact.

        Masks do make a difference, not 100% effective, but they make a difference. This will become the new norm where you can go into a supermarket and buy a 50 pack of masks – like you can already do in lots of Asian countries.

        • Harry T says:
          23 Apr23 April 10:24

          Correlation does not necessarily indicate causation. The evidence for mask use is largely poor quality and equivocal, as there are too many variables to account for. It could prove useful in certain contexts but even the WHO doesn’t recommend masks for healthy people outside of healthcare settings. Just because an idea seems intuitively correct doesn’t mean that it’s true.

          • Qfx says:
            23 Apr23 April 10:36

            So because the evidence is weak, dont wear a mask until proven otherwise? (The charting i discussed had a lot more detail to it than i would go into on a points forum). Or continue to let people get infected whilst we review the evidence? It is hardly ‘protect the NHS’ is it?

            Meantime other countries, now including Germany, are requiring the public to wear masks. At the very least it is a sensible cautious approach to take and combined with continued social distancing.

        • Nick says:
          23 Apr23 April 10:29

          The Nightingale hospitals will turn out to be white elephants, a huge waste of effort and money. The London one has barely been touched (and has no staff anyway). The future inquiry will agree but also determine ‘better to have and not need than need and not have’.

          • Rob says:
            23 Apr23 April 11:00

            Agreed. But it is necessary, because the Government can now take more risks knowing that the capacity is there.

          • Henry says:
            23 Apr23 April 14:41

            Nightingale hospitals were never built for the initial infection. There were built for the 2nd wave hence they haven’t yet been fully staffed etc. As soon as we undo the lockdown everyone who has been closed away and not gaining any immunity will walk straight into it. Come the Autumn a different story will be told. There is worse to come I’m afraid. Cheer up!

    • J says:
      23 Apr23 April 09:56

      I completely agree.

    • Kier says:
      23 Apr23 April 10:00

      I agree with you, masks help in a pandemic. From a purely selfish point of view though, wearing a mask doesn’t help you, it prevents the people around you being infected by you.

      You are relying on everyone else to wear a mask if you want to see the benefit

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