How Airlines Are Generating Revenue on Flights That Will Never Take Off

Shaun H. Ruff

U.S. leisure travelers often buy airfare months ahead of departure, betting they can score a deal with shrewd advance planning. But in these atypical times, that may not be the best strategy — provided they want to fly what they bought.

That’s because many airlines have not yet decided what they’re going to fly more than a month or two in advance. With Covid-19 significantly depressing demand for air travel — yes, even despite slight recent improvement — airlines are desperate to have the right number of seats for passengers who show up, and they’re waiting until much later than usual to make cancelations.

Typically, a major airline might lock schedules 120 days in advance, but many now push significant changes 30 to 60 days in advance. Some even make operational cancelations as soon as a few days before departure, wrecking travel plans at the last last minute.

Airlines are waiting longer than usual to set schedules for several reasons. Perhaps most importantly, while airlines usually rely on sophisticated computer systems to guess how many people will book and fly, the platforms never have seen a global pandemic, so they can’t make accurate predictions on demand. By selling everything, airlines generate real-time data about who wants to travel, and when.

Revenue is also a key concern. By listing more flights for sale, airlines can sell more tickets, getting cash in the door. In some instances, carriers technically owe customers refunds when they make substantial changes, but in recent months, carriers have become stingier with giving them. In many cases now, the airline will either rebook the passenger, or provide a travel voucher, ensuring the revenue remains.

In selling so many flights that probably won’t fly, “We wanted to create as much selling opportunities as possible coming out of a negative to net zero demand environment,” Scott Sheldon, the chief operating officer of Allegiant Air, said on his airline’s May 12 earnings call.

Money In The Door

As of Memorial Day weekend, United Airlines still had not locked its domestic schedule for most of July, or any month beyond.

A customer who searches the airline’s website and sees the breadth of flights might think United expects a miraculous recovery by mid-summer. That’s not happening, as United already has told investors it is cutting 75 percent of the July schedule. United is just taking some time to decide what will stay and what will go.

“Is it going to fly is the key question,” Andrew Nocella, United Airlines’ chief commercial officer, told employees at May 15 town hall meeting. “We are monitoring demand, so we haven’t made schedule changes because we don’t know what demand will be in the fourth quarter or the third quarter. But we are monitoring it, and we are hoping to fly as much as the airline as we possibly can.”

United’s Newark to Orlando route is an example of this strategy. It’s usually a popular July route, as three groups – New Yorkers, plus connecting domestic and international travelers — may hop on a plane at Newark to fly to Disney World and other attractions.

The international travelers aren’t
coming this year. At best, airlines can capitalize on pent-up demand among domestic travelers tired of staying home. Maybe at the right price, they’ll buy a last-minute fare to Orlando.

But United’s schedule isn’t optimized for last-minute deal seekers. Instead, for much of July, United has been selling nine flights, giving customers the illusion of choice. The actual schedule is expected to be slimmer, closer to the three flights the airline is operating through most of June.

“Domestically, in July, August and beyond, we’re selling our full schedule,” Nocella said in Mid-May. “Every flight from Newark to Orlando, or wherever it may go, is part of the domestic schedule and is out there and selling. So we are able to monitor demand on all those flights.”

United is far from the only airline with this approach. Airlines generally don’t announce when they make schedule changes, but Delta pushed through major July cuts just this past weekend, according to people who watch it closely. Meanwhile, as of Memorial Day weekend, American still had not finalized its July schedule, though it probably will within about a week.

In July, American is expected to make harsh cuts, but its schedule still shows 10 flights per day from New York to Los Angeles. In June, for which the schedule is (mostly) finalized, American is flying just three flights per day.

What About 2021?

There’s even more uncertainty farther out.

Like most U.S. legacy airlines, American is selling flights for the next 11 months. Airlines never know exactly what they will fly that far in advance, but schedules tend to not change much year-over-year, so most early-booking passengers fly roughly what they bought. (They’re more likely to get an email telling them about a 20-minute change in departure time than something that ruins their plans.)

In this case, though, American has no idea what it will fly. Rather than using the previous year’s schedule as a guide, American executives recently told investors they will start from scratch in 2021. The schedule could change significantly by then, which might be news to someone who buys a ticket now for a Spring Break 2021 trip.

“We are just now starting kind of a clean sheet exercise for what 2021 might look like,” Vasu Raja, American’s senior vice president of network strategy said on the airline’s first quarter earnings call. “And so I couldn’t tell you with a lot of clarity.”

Schedule Integrity

During the beginning of the crisis, when events moved so quickly airlines had no choice, some larger carriers canceled flights on the day or week of departure, because they were nearly empty.

On the worst days this spring, American would cancel more than 1,000 flights at the last minute, an airline spokesman said, since it was only way the carrier could align supply and demand on short notice. Largely, passengers just stopped showing up, and American didn’t want to fly empt
y aircraft.

Big global airlines generally don’t like to make so many late cancelations. In normal times, they believe in what the industry calls “schedule integrity” — or flying the published schedule. It’s one thing to push through a schedule change a month from departure through official channels, they say, and another to slash flights 24 or 48 hours before takeoff.

Late cancelations can disrupt the operation, with airplanes, pilots and flight attendants out of position. And while most customers can handle an itinerary change five weeks out, allowing them time to rebook, travelers (especially road warriors) don’t like late changes.

It’s a different calculation at Allegiant Air, one of four U.S. ultra-low-cost-carriers. Allegiant has loyal customers, but it mostly competes on price, calculating it can win customers as long as it is cheaper.

With a different model than American, Allegiant is more willing to make late cancelations, executives said. Rather than making published schedule changes, Allegiant has been examining the cash profitability of each flight, and making late decisions about which to fly. If it’s a loser, Allegiant cancels it, rebooking the few passengers who were on it.

Executives admitted this is not a viable long-term strategy, but for now, they say it is most effective. By waiting to cancel, Sheldon told analysts the airline can capitalize on a fast-moving situation, such as if a city unexpectedly opens up, creating last-minute demand.

“At the end of the day, we ultimately have to get back to flying the schedule we publish,” Sheldon said. “There has to be schedule integrity given the traditional frequency profile we fly. But as loads and demand slowly build, we can continue to execute on this strategy — basically, low load cancellations equals minimal passenger disruptions.”

Sun Country Airlines, another ultra-low-cost carrier, also is making late tactical last-minute changes, said Jessica Wheeler, senior director of marketing.

When the crisis hit, Sun Country instituted a new morning meeting to discuss the cash viability of each flight for the next week. Like Allegiant, it cancels clunkers, especially if it flies multiple flights per day between the two cities and can consolidate two flights into one.

“It might not be perfect but we are cutting the flight and putting you on the same route an hour later,” Wheeler said. “I can’t say that there aren’t certain people who have voiced frustration but we have been very cognizant about making sure we are re-accommodating those folks with a reasonable alternative.”

At these meetings, Sun Country also occasionally adds flights, Wheeler said. Like many airlines, Sun Country recently consolidated destinations to streamline operations and reduce cash burn. For example, rather than flying Minneapolis to Tampa and Minneapolis to Miami, it now uses one airplane to fly Minneapolis-Miami-Tampa.

But if Sun Country takes more bookings to Miami and Tampa than expected, it will revert to two non-stops on a one-time basis, Wheeler said.

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