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May 28, 2024
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We’re coming into the hurricane and stormy summer seasons for North America, which can shut a hub airport and cause flight cancellations that could have airport terminals looking like makeshift hotels.  A major reason airports will fill up with passengers is that they cannot be re-accommodated because of the success of airline yield management systems and their effectiveness in filling cabins.

Looking back over the past 50 years, load factors were much lower, averaging about 65% until yield management systems began to dramatically reduce the number of perishable seats that went unsold.  While there is still a Tuesday in each week, and the chance that flights won’t be quite full, finding an empty seat next to you on a flight is a rarity these days.

That lack of empty seats leads to cascading delays.  Let’s compare the number of flights it would take to accommodate all of the delayed passengers assuming a historic 65% load factor versus today’s 82% load factor.  The following table shows how passengers from a single cancelled flight would be fully accommodated by the 3rd flight following a single flight cancellation.  With a 65% load factor, 98 passengers would require re-accommodation, and could be readily accommodated in 2 additional flights.  With 4 flights per day in most markets, unless the last flight of the day is cancelled, overnights and hotel stays would be minimized.

Now assume an 82% load factor, what the US industry has recently been averaging, and difficulties with delays become more apparent.  The 123 displaced passengers would not by fully accommodated until the 5th flight after cancellation, which in many markets means an overnight stay.

It now takes more than double the number of flights to fully re-accommodate all of the passengers for a single flight delay.  But what happens when bad weather hits, and three consecutive flights are cancelled? The following table presents a picture of how long the recovery might have taken in the old days – about 6 flights – perhaps a one day delay.

But with today’s higher load factors, three cancelled flights can lead to lengthy re-accommodation delays, particularly for those on the third cancelled flight.

In a market with four flights per day, the last passenger to be accommodated would have a three day delay in getting home.  And, of course, major storms often cancel more than three flights, exacerbating the problem.   The question for airlines is how they establish priorities for re-booking, and how to get to the head of the line.  There are two answers, money and frequent flyer status.

How big is the problem today? A reasonable guide to the issue is denied boardings, which is tracked by the US DoT and shown in the next chart.

It would seem that airlines are effectively managing denied boardings even with much higher load factors. However, the volume of people impacted by denied boardings is significant, as the following chart will illustrate. Typically around a minimum of 600,000 people go through this each year in the USA. Airlines have effectively kept the involuntary numbers low. Travelers in the USA are familiar with the refrain “We are in an overbooked situation and are offering $xxx in compensation if you take a later flight”.

First Class passengers and full fare passengers are the first to be accommodated, as they provide the airlines revenue lifeblood and paying the most, they should be entitled to some benefits.  Next in line will be the most loyal customers of the airline – the diamond, platinum, gold, and silver tier frequent flyers, with different priorities.  A diamond level million miler, even on a discounted ticket, would likely obtain a higher priority than a non-elite level traveler at a higher fare, as that loyalty is appreciated by the airline.  But the process is one of the state secrets at an airline – how re-accommodation priorities are established.

Our advice for passengers:

  1. Watch the weather, and try to avoid a major storm.
  2. If you must fly during a storm, purchase a full fare refundable ticket.  Yes, it will cost more, but it provides you more flexibility when it “hits the fan.”
  3. Fly on the carrier with whom you have the most loyalty and the highest status, as you will obtain priority treatment in the event of a cancellation.
  4. Be patient, but look for alternatives from nearby airports, which may have flight availability, even if well out of your way.  Florida to New York via Chicago today is better than waiting for a non-stop tomorrow.

Our advice to airlines:
When a storm hits, accommodate passengers by openly endorsing tickets. This means the airport’s full available capacity can be used to get everyone out. It may cost some revenue, but in an age of social media, you do not want images of mayhem online and your brand highlighted. Your pressurized airport staff will appreciate this act of kindness, too.  Watch your brand image because because videos and images stay online forever. Swallow the revenue hit and minimize the long tail pain.

Advice for OEMs:
Airlines are focused on capacity control, and prefer not to increase frequencies or add additional aircraft in many markets. But airlines also find their capacity frequently tapped out when average load factors are over 80%.  There are two answers to that problem, one short-term and the other longer-term.  The short-term solution is more seats on each aircraft, which the new generation of thin-line seats is permitting, a la Southwest and Lufthansa. The longer-term solution is larger aircraft serving growing markets.  With the airlines in better financial shape than they have been in a long time, the narrow-body fleet replacement cycle has accelerated.  And with new, more efficient smaller aircraft emerging, the existing 737-700s or A319s are being replaced either with larger 737-8Max or A320neo, or could be by more efficient CSeries and E2 models.  For Boeing and Airbus, the strategy is to push larger models in the current replacement cycle.  For many markets, the E-Jets and CSeries provide an excellent alternative to older RJs as well as 737-700s and A319s at the high end of the segment.

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