What does it take for an airline to break even on a flight? Well, it's complex

2020-01-24 14:00 - Selene Brophy
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The state is struggling to raise the necessary guarantees for a R2bn loan from banks – which South African Airways sorely needs to stay afloat.

The R2bn was due this past Sunday, 19 January. SAA’s business rescue practitioners then opted on Tuesday, 21 January to consolidate some of SAA's domestic and international flights schedule due to low demand, as a means to conserve funds.

It raises the questions of how do flight fares factor into the overall profitability of airlines, considering the legacy of the aviation industry dominated by the notion of “how many seats it can sell, as opposed tailoring services and offerings to customer’s needs”. 

UPDATE: SAA cancellations remain in place until the weekend - Here's what affected SAA ticket holders need to know

So SAA’s woes aside, how many passengers does it take for an airline to break even per flight - if that is even the case?

Traveller24 contacted aviation specialist Linden Birns, Managing Director of Plane Talking who says it specifically boils down to "revenue and yield management".    

“In the old days (when fares were pegged and the market tightly regulated), there was a crude assumption that if 60% of the seats were sold, the flight would make a 7% profit”.

But a number of factors have thrown this formula out the window – especially the low cost model, says Birns.

“Deregulation, which permits dynamic pricing has rendered that old assumption to be obsolete and irrelevant.” 

As a result, break-even is a number that will be unique to every single flight and “considers a number of variables”.

These main variables are as follows:   

1. The mix of fares, within each class of travel, that seats are being sold at on any given flight. 

  • Prices will fluctuate according to things like departure and arrival times (fares on flights that leave and/or arrive at peak desirable times are generally more expensive than those offered by the same airline, on the same route, but at less convenient times. 

"BA’s flights between Cape Town and London are a good example of this", says Birns.

  • Market elasticity – this is how much people in a particular market are prepared to pay to travel on your flight before they are deterred and fly with someone else, or not bother flying at all.  

“You may have people on the same flight, sitting next to each other, who have bought their tickets in different countries and therefore paying quite different fares,” he adds.

2. Passengers’ ultimate destinations. 

  • Many might be connecting onto onward flights to other destinations.  The  fares charged will be calculated according to where each traveller is going, the demand for seats on those onward journeys and how much the airline may have discounted the domestic flight in order to feed that traveller onto those onward connections. 

Birns says, “Keep in mind that while a particular flight may only be between Cape Town and Joburg, not all of the passengers are ending their journey in JNB. “

As an example, he says the portion of the fares charged for the Cape Town-Johannesburg sector will be calculated according each traveller ‘s onward destination.

"Not all of the passengers on that flight are ending their journey in Johannesburg. Some will be connecting onto onward flights to other destinations."

Profitability would factor in the "demand for seats on those onward journeys and the size of the discount the airline has provided on the Cape Town-Johannesburg portion of the total fare in order to feed that traveller onto those onward connecting flights.”

3. Fuel costs

This will be determined by the distance to be flown, the total aircraft weight to be flown, the outside air temperature at the time of take off and the length and elevation of the runway being used for take off.

"At OR Tambo these three items alone are critical and can often make the difference between a profitable or loss-making flight," he says.

Fuel prices are also important, emphasises Birns.

"Jet fuel is not sold at a fixed standard price worldwide. Fuel prices in Africa are generally higher than in the US, Europe or Asia. And it can be a lot more expensive in some African countries, as is the case in Angola, compared to South Africa."

So the airline has to calculate what it will cost to refuel the plane if the flight under consideration requires an en-route refuelling stop - as an example, SAA’s flight to Washington via Accra.

If it needs to be refuelled at the destination airport before it covers the return journey back to its home base also needs to be considered.  

4. The operating cost of the aircraft

This includes the actual ownership of the plane, ground handling services as well as forecast services for the weather. Birns breaks it down as follows:

  • This will include the ownership or lease costs of the aircraft and its engines
  • The finance costs to finance the ownership / lease of the aircraft and its engines
  • Airport parking, approach and landing charges
  • Ground handling services, eg. buses to take passengers to the plane, baggage handling and loading, cabin servicing and replenishing, water and waste handling, ground power consumption while the engines are shut down, etc.
  • En route navigation and overflight charges
  • Aeronautical weather forecasting charges
  • Any other taxes, eg. SA’s Carbon Tax on domestic aviation
  • Maintenance of the aircraft and its engines 

5. Other airline overheads

These will include things like office rental and salaries for airline staff at its home city and at the destination the flight under consideration is flying to or from. 

"Some airlines outsource their sales, airport check-in and ticketing, dispatch and other tasks to 3rd party service providers, for example, BidAir Services or Swissport."

SEE: Is SAA's new A350 plane on its New York route too little, too late?

So while ticket prices can seem exorbitant, in the grander scheme of things, the costs certainly do stack up when it comes to keeping these airlines profitable and competitive. 

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