Should airlines cut fares to pull the punters?

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Sally White analyses the tough business of aviation and a Skyscanner report that recommends that airlines cut prices on transcontinental routes

More and more people are travelling, yet money is still tight in aviation. That is very clear from the news coming out of the industry’s big 2017 event – this week’s Paris Air show. Overall the airlines got away quite a few fare rises in the last few months, yet the manufacturers admit there are an awful lot of new planes parked. Planes not being used represent about 6% of the narrow-bodied (single aisle) fleet and 10% of the wide (two-aisles). 

And another marker! The airline body, the International Air Transport Association (IATA), has just knocked a billion dollars off its estimate of their last year’s profits.

So, on the face of it, Skyscanner’s suggestion that it’s worthwhile for airlines to look at a low cost fare strategy on transcontinental routes is a bit strange. Surely that sounds like less revenue? Even Skyscanner admits that “many airlines’ attempts to introduce low-cost long-haul services have fallen flat”. Nevertheless, the metasearch has done some digging through the mountains of data it accumulates (from the 60 million travellers using its search engine every month) and has come up with some analytics.

“The analysis …shows this market has the potential to be popular for airlines willing to drop their prices due to strong passenger intent for low cost tickets on transatlantic routes,” states the White Paper presented by Faical Allou, head of business development for Skyscanner’s Travel Insight product. He believes that it is important for airlines to consider ‘price elasticity’ - that is understanding how many more passengers would fly if the prices were to drop.

Yet is very much a question of pitching the price/costs ratio right. For example, the report points out, Oasis Hong Kong airlines in Asia and Canada-based Zoom Airways show what happens when it wasn’t!

…compared to other route groups, the Transatlantic market is especially price elastic with ample demand from travellers

Skyscanner’s research of a year’s data found that “compared to other route groups, the Transatlantic market is especially price elastic with ample demand from travellers…” This was after looking at some other busy routes. (Spain, it found, seemed to have the right profile for a more price elastic approach in theory, but its practice has already been stimulated by low cost airlines for years.) 

The Transatlantic finding will, as it says, come as good news to several airlines that have entered this market. Norwegian, for example, has just announced the launch of a new Rome to New York route (Skyscanner’s top tip). IAG’s new Level brand and Jet2’s low cost approach also show that other airlines appreciate the revenue to be made. But, scope to boost profits is going to diminish if too many rush to the market! 

Getting it right

Assessing price elasticity, as aircraft manufacturer exhibitors at Le Bourget this weekend knew only too well, is an important factor in selection of new aircraft. The timescale from drawing board to runway is years, so they cannot afford to make too many mistakes.

Boeing has just come up with a new concept to try to catch the airlines’ eye – the Boeing 737 Max 10, which it launched at the show. This is an aircraft catering to the middle-of-the market in terms of distance and size- one with 200-275 seats and able to fly 4,500-5,000 miles. It estimates that there is demand for around 4,000-5,000 of them.

Middle ground is a market Boeing has not been in until now, but its major competitor Airbus judged the growth in demand right. Boeing already has appropriate planes in its A321LR and A330neo, according to analysis by Deutsche Bank. 

The importance of getting it right is shown by the latest figures from IATA.  Financially the industry is in better shape than a few years ago, but the price of air travel in Q1 was “around 10% lower” than at the same time last year. 

Of course, it was lower prices that were a major driver, says IATA, for rising passenger numbers (up 10.7% overall in April on the same month in 2016, and up 12.5% on international routes.) IATA reckons that falling fares “accounted for around half the demand growth,” which was the fastest pace of growth for six years.  

European carriers saw demand rise by 14.4%, as their local economy improved, Latin American demand gained by 16.1% and African airlines saw a stunning gain of 17.2%.  

Less good news, however, is that IATA raised another point, which could impact Skyscanner’s advice on transatlantic routes. According to Alexandre de Juniac, IATA Director General and CEO, the ban on electronic devices is having an adverse impact, with revenue per passenger mile down 2.8% on Middle East airlines flying to the US. This was the first decline on the route in seven years.

The ban on electronic devices is having an adverse impact, with revenue per passenger mile down 2.8% on Middle East airlines flying to the US

Global demand should be making airlines look around more widely. There was much talk at the Parish air show of the new manufacturers aiming at the international market, with both China’s Comac and Russia’s Irkul having begun testing new airliners, according to the BBC.

So, business is tough and seems to be getting tougher. The numbers flying may top four billion, but on average the airlines are now making only $7.69 a passenger, down from $9.13 in 2016 and $10.08 in 2015, and margins are shrinking.

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