Social distancing a nightmare for airline economics

Recently IATA Chief Executive Officer, Alexandre de Juniac, was quoted saying “Cheap travel is over”. This was the summary of a response provided to a question asked about how social distancing on aircraft would impact fares and yields for airlines. Removing the middle row seat of a single-aisle aircraft essentially reduces the number of available seats that an airline would have available to sell. For an airline, losing a large portion of supply unequivocally has an impact on price.

We have taken a look at what this may mean for airfares by way of a break-even analysis for a sample aircraft in an Australian aviation context. The analysis can be applied to any market though.

We used the Boeing 737-800 as an example when analysing the Australian domestic market as both Virgin and Qantas widely operate the aircraft across their domestic network. Qantas has a 174-seat configuration with 12 business class seats. As per the seat map of a Qantas B737-800 below, if we block out the middle seat in every trio of seats and one business class seat from each pairing and count the amount removed, we will end up with 60 less seats. This now reduces the available seats from 174 down to 114.

Source: Qantas.com. Blocked out seats added to Qantas image

The breakeven fare has been calculated for both a control (pre-covid19) and social distancing scenario for a typical short-haul sector, in this case SYD-MEL. The following parameters were used:

*Qantas in their 2019 annual report reported group c/ask as 7.9. This is likely to be higher on a short domestic sector as the figure includes long-haul international values as well. For the purposes of illustrating the point, a cost of 10.0 c/ask has been used.

To calculate the breakeven fare, the breakeven trip cost is divided by the number of assumed number of passengers. The results are presented in the following graph.

Social distancing on aircraft has caused an already complex situation to become more so. If an airline raises fares, will there be enough demand at those levels to achieve the load factor target? If they maintain fares, they will take a loss. In Australia, the federal government has already implemented a scheme to subsidise domestic routes to keep airlines flying for essential travelers to combat this effect.

Fundamentally, an airline cannot operate a narrow-body cost structure against regional jet capacity. It is likely that government subsidies may continue into the future or air fares would have to rise significantly to maintain financial viability.