We’ll compete hard for customers, understanding it will be a brutal, low-fare environment as there are far more airline seats, and there will be for some time, than there are customers.
2. Declining revenue per available seat mile
To observe physical distancing measures and make customers comfortable enough to fly, airlines have had to remove the middle seat, among other steps. Realistically, they can only operate at 70% capacity.
This is below the break-even load for most airlines, including the U.S. Big Four. American’s break-even load factor is 78.9%, United’s is 75.6%, while Delta’s is 74.2%, according to Florida Panhandle.
Southwest is the most efficient of the Big Four managing to break even at a load factor of 72.5%.
At 70% capacity, Southwest makes a loss of $782 when operating a 216 passenger aircraft on a 1,000-mile route. American books a loss of $3,519 under similar circumstances.
This means airlines would have to raise fares and cut costs drastically to break even while adhering to physical-distancing measures. The former is unlikely in the current environment.
There are also limits to the latter, with fuel-efficient planes such as the Boeing (NYSE: BA) Max jet grounded and the federal government’s bailout conditions prohibiting layoffs before September.
3. Rising oil prices
On average, fuel costs account for roughly a quarter of airline expenses. The demand-destruction in passenger traffic coincided with tumbling oil prices. But after the drastic fall, oil has staged a dramatic recovery.
Had oil prices remained low, it would have been a relief to airlines in terms of operating expenses. This is not the case, though, as major oil producers are pushing for further cuts.
Russia and Saudi Arabia have already agreed to extend output cuts by one month. The two countries had earlier settled on reducing total global output by 10% or nearly 10 million barrels per day. With such cuts, it is a foregone conclusion that oil prices will keep climbing.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.