Airlines are dealing with major issues like weak business demand, vaccine mandates, and worker … [+]
Airlines have had a rough go since the pandemic began, with business travel coming to a quick halt and continually changing rules by states and countries for what flyers can do once they land. Especially hard hit has been long-haul international travel. These kind of trips are often flown by the largest wide-body aircraft, like the Boeing 787 or Airbus A330. Without business travelers to pay the rates necessary to operate these expensive machines, many trips have been cancelled. Even when you see one in the air, there is a good chance that the trip is being paid for by the cargo in its belly. The general thought is that once business travel returns, these long-haul trips will also return and get things back to normal.
But when will this happen? The outlook is uncertain, and long-haul business travel is the longest pole in the tent. This creates a challenge for airlines with a lot of wide-body aircraft. Airlines are dealing with this challenge now in more of a wait-and-see mode, meaning that they are not making big changes until there is more clarity on how business travelers will react. This treading water approach is creating other issues that promise to be a challenge for the largest airlines over the next year or two. Here are five of the biggest:
Wide-body aircraft have high fixed costs and are expensive to operate. When they are in an airline’s fleet, there is good incentive to fly these planes rather than absorb this heavy burden. As a result, airlines have been using larger wide-body aircraft on domestic routes. This makes sense in the short-term, as it puts these big machines into use and actually lowers the cost per seat for the airline doing this, allowing them to lower prices to help fill the seats.
The risk here is that domestic routes end up with too many seats for demand that is still mostly leisure-based. A smart airline executive once said, “the root of all evil for airline revenue is excess capacity.” Excess capacity destabilizes pricing, and an airlines’ low marginal costs leads to this result every time there are more seats flying than passengers willing to pay for them. If these big airplanes cannot soon be redeployed back into international markets, it will be a good situation for airline consumers but weak unit revenue results for the big U.S. airlines.
While wide-body aircraft on domestic routes will lower the seat cost for airlines, the average costs for the airline will rise for several reasons. One is that the bigger airlines are substituting for smaller airplanes on the same route. That plane then must then be redeployed at the same utilization (number of hours flown per day), or else the airline is reducing its narrow-body flying. This means it will need fewer pilots and flight attendants, and those that leave will be the most junior, lowest-paid of the groups.
Also, an aircraft flying at altitude is the most efficient. It has less drag because the air is thinner at altitude, and its own inertia helps keep the plane moving with help from the engines of course. It is the fuel-intensive take-off, and airport-fee inducing landing, that drive a disproportionate amount of an airline’s trip expense. When flown domestically, the average flight length of these big airplanes is shorter than when they are deployed internationally. That means more take-offs and landings thus higher average fuel burn per mile. It also means operations that are more maintenance intensive. So, whether it’s fuel, crew, or maintenance, the average costs for the airlines who have to deploy their big equipment domestically will rise. This puts pressure on their ability to drive profitable operations with mostly low-priced leisure passengers.
If the world ends up needing fewer wide-body aircraft but more narrow-body aircraft, this will quickly create potential supply shortages for these smaller planes and higher prices for them. When the Boeing 737 MAX came back into service, it took some time to start creating orders again and I’m sure the big orders placed by RyanAir, Southwest Airlines and others were struck at especially good prices for the airlines. If a smaller airline now wants the 737 MAX, Boeing is in a different position as the return of this plane is now accepted by the market.
Both Airbus and Boeing trumpet their backlog, or the number of planes that are on order but not yet delivered. This is done in part by managing production, and serves to keep residual prices high and purchase prices ever higher. With more potential demand for these smaller jets, these prices will rise faster and that has the downline effect of raising prices for customers to cover that extra cost. It also may mean that the backlogs will grow, making it longer and longer for new orders to get their first delivery after signing.
I earlier wrote about how airline frequent flier programs will need a major pricing change due to dramatic changes in mileage accrual. Even more recently, the big airline loyalty programs have rankled some customers by extending benefits for relatively modest usage. Those who have continued to fly and earned their status “the old-fashioned way” feel that others have been let into their club too easily. Changing pricing and keeping customers feeling loved are just two of the frequent flier program challenges the big airlines now face.
Additionally, some of the long-haul flying that has been shut down for now also are routes that burn off significant accrued liability. With fewer long-haul flights to do this, there could be a run on seats to Florida, Arizona, Hawaii and other domestic or near international locations. This is also consistent with flyer concerns about long-haul international travel given the ever-changing rules about what is required and “what if I get stuck” fears. For many reasons, the loyalty businesses at the big airlines are in flux.
While all this is going on, and airlines are also dealing with vaccination programs for their employees, the low-cost airlines in the U.S. continue to aggressively expand. Spirit Airlines has announced a big entrance into Miami airport, long an American stronghold hub. Southwest Airlines has moved into Chicago’s O’Hare and Houston’s Intercontinental airports, despite its strong positions at Midway and Hobby airports respectively. JetBlue has taken over flying in the Northwest that used to be flown by American. Prior to the pandemic, the market share of the of the four largest airlines in the U.S. reached over 80%. With these airlines dealing with the issues here and others, the low-cost airlines are adding flights and opening new city-pairs for nonstop service. Two new airlines, Avelo and Breeze, are taking advantage of traditionally underused airports. The result of this is that over the next few years, it is likely that the share of the big four airlines will drop into the mid-70’s. This is good for consumers as it shows the industry becoming more competitive after many years of consolidation.
The big airlines in the U.S. will survive and ultimately do well again. But in addition to dealing with the real-time problems today caused by the pandemic, they also need to keep a keen eye toward these looming issues that are ready to bite them just when traffic starts returning again.
I am the former CEO of Spirit Airlines, where my strong team transformed the company into the highest margin airline in North America and created a new model for air
I am the former CEO of Spirit Airlines, where my strong team transformed the company into the highest margin airline in North America and created a new model for air travel in the US. I now serve on several public and private company boards, am an Adjunct Professor of Economics at George Mason University, and co-host the popular weekly podcast Airlines Confidential.