Do the Airlines Really Need to Increase Fares 50% if Not Selling Middle Seats?

 

The airlines tell us it is simple math.  If they take out the middle seats on their flights, that means a 33% reduction of seats on a narrow bodied plane (three seats on either side of a single aisle).  They’ll need to increase fares by 50% to compensate.  Six seats at $100 = $600, the same as four seats at $150.

On the face of it, this seems like an unassailable truth.  And we definitely see value and improved safety in it for passengers, particularly if the airlines do something like this to their middle seats.

But…….

The truth is not quite that simple, and the good news is, for us as passengers, the airlines don’t need a 50% increase.  They are overstating the fare increase needed by a factor of close to three.

There are seven points to consider.

1.  Average Flight Loadings

If a plane is 100% full, then for sure, taking out one seat in three does exactly mean a 33% reduction in seats sold.

But, most of the time, flights are not 100% full.  According to the excellent Bureau of Transportation statistics service, for the two years through Feb 2019 and Feb 2020, airlines averaged an 84% load factor.

So the impact is not from 67% to 100%, it is from 67% to 84%.  That’s a milder 20% reduction in seats, with a matching requirement for a 25% increase in fares, not a 50% increase in fares.  Right from the get-go, the airlines are overstating their need to increase fares by a factor of two.

2.  First Class Policy

A typical narrow body plane has several rows of flight class seats, with two seats on either side of the aisle.  We don’t know, but we’re guessing airlines will continue to sell all these first-class seats.

If we consider a typical plane – the 737-800 being the most common in the US – it is generally configured with four rows of first class seats (16) and 25 rows of coach class seats (150).  That is a total of 166 seats.

So an airline would be removing the 50 middle seats, out of a total 166 seats, which is a 30% not 33% reduction in seats (and even less when adjusted for actual load rather than theoretical full load).

Furthermore, the first class seats bring in more revenue than the coach class seats.  The unsold middle seats are the least valuable of all seats to the airline.

2.  Exceptions to the “No Middle Seat” Policy

Occasionally there will be families with three or more people traveling together.  They can safely be seated in a block of three seats, because if the family is living together, there is no added risk from sitting closely together on a flight.

We don’t know what percentage of the time this factor would apply, but we’ll suggest that there is at least one family of three on an average flight.  Our guess is the number is more likely to be two or three, but let’s be conservative and say only one.

That means a loss of only 49 rather than 50 middle seats (before considering the other factors).

3.  Saving in Costs from Unsold Seats

Even though the airlines try their hardest to minimize the costs they incur with flying every passenger, they still incur some small costs for each passenger.  So if they forego $100 of revenue, that is not the same as missing out on $100 of profit.

They’ll save a little money in not giving out frequent flier miles, burning less fuel because of a lighter load, a bit less wear and tear, no need to give away a free cup of water, and if they’re lucky in terms of total numbers reduced, they might be able to now save on one of the flight attendants.

Let’s just say that if they miss out on a $100 passenger, they are only missing out on an extra $90 gross profit.  Again, we feel this number is being very fair to the airlines.  So they don’t need to recoup all $100 of each extra fare they’ve not received, just $90.

4.  Freight

Two points here.  The first is we have been working on the assumption that all the money an airline earns from flying a plane between two cities comes from passenger fares.  That is not so.  Some measurable amount comes from carrying commercial freight as well.  This has been not a great deal in the past – 1% – 3.5% depending on the airline.  Let’s call it 2%.  That number will not reduce when the passengers carried reduces.

Which brings the second freight point.  If their passenger numbers drop by 25% – 33%, it is reasonable to assume the luggage carried drops by a similar amount, opening up extra space for revenue-generating freight (and also extra weight capacity if the flight is weight restricted).  So there is a slight opportunity to increase freight revenues to partially offset the lost passenger revenues.

5.  Blocked-out Seats

Some flights have empty seats because they can’t fly full due to fuel/range/loading restrictions.  In such a case, the blocked out seats can be the middle seats, and so these flights (there are not very many of them) will have less or no impact at all by a “no middle seat” policy.

6.  Adding More Flights

If the removal of middle seats from flights means there is now an excess of demand, airlines can respond by simply scheduling more flights.  This is particularly practical on routes where multiple daily flights are already operated.  Those passengers need not be totally lost.

Of course, operating four flights with as many people in total on them as were previously on three flights is more costly, but it is not as costly as simply losing the revenue from the offloaded passengers altogether.

7.  Adjusting Fare Levels and Yields

If the airline needs to get extra money from a smaller number of passengers, that does not mean  everyone’s fare will simply increase by a flat percentage.  That is not the way the airlines work.  Some fares will increase more than others, because the market and demand for air travel is and always will be moderately price sensitive.

Especially if the airlines don’t compensate by adding extra flights, there’ll be a shift in how the fares on a flight are allocated, with more higher fares and fewer lower fares, but conceivably still some fares at the same levels as before.

Your particular fare might be the same as it was before, or it might go up, and if it does go up, you might choose to simply change to a different flight and/or a different airline, perhaps earlier or later in the day, where you can still find a lower fare.

Adding All of This Together

So, what does this all mean?  Let’s look again at the 737-800 with 4 rows of first class seats (16) and 25 rows of coach class seats (150).  Let’s say first class fares are $200 and coach class fares are $100.

Before any adjustments, the flight would have had an 84% occupancy, so that is $15,288 in passenger revenue and 139 passengers.  Add another 2% for freight ($306) and that is total revenue of $15,594.

Now let’s reduce the load to allow for no middle seats with one exception (due to a family traveling together).  That gives us 16 first class seats and 101 coach seats – 117 passengers instead of the 139 before.  Let’s also allow for slightly increased freight ($350 instead of $306), and recognize the $10 saving from each of the 22 passengers not now flying ($220).

So from the total revenue of $15,594, we subtract freight and not-flying passenger savings and that leaves us with $15,024 still needed.  At the earlier fares, we’d generate $13,300, which leaves us with a $2,294 shortfall.  That is the same as a 17% fare surcharge.

Not considered in this calculation is the potential to recover some of this shortfall by adding extra flights, major savings like reducing flight attendant numbers by one, the fact that middle class seats generally sell for less than aisle and window seats, or the lesser impact on flights that can’t fly full currently, anyway.

It is true we are assuming all flights average 84% loads.  Some flights have higher load factors, and they’d lose more revenue.  But, for every flight with a higher load factor, there’s also another matching flight with a lower load factor and therefore less opportunity cost to block out middle seats.  That’s the nature of an average, and after considering both the pluses and minuses, it brings us back to the average load and average situation we’ve looked at.

But the across-the-board 50% extra cost of tickets threatened to be imposed by the airlines if they removed middle seats is actually three times higher than the true extra ticket price that airlines would need to add – a much more moderate 17%.

You can adjust these assumptions and numbers any way you wish, but it seems impossibly difficult to get close to the airline claims of air fares needing to increase by 50%.

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