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JKzhong
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Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:21 pm

Delta's break-even load factor is around 75-80% but they are currently flying at around 40-50% and are capped at 60%.
Wouldn't it then make sense just to leave the plane parked?
I'm thinking maybe it's about holding on to the market share? Or a lower than break-even load factor can still reduce cost (expected to be lowered to 30 m daily late june)?
Could anyone explain thanks!
Last edited by JKzhong on Fri Jun 19, 2020 3:26 pm, edited 1 time in total.
 
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Stitch
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:24 pm

A couple of reasons:

1) Even at a lower than break-even load factor, if they have passengers wanting to fly, not operating the flight means they may go to competitors and not come back;
2) The plane might be needed at the destination to service another follow-on flight;
3) Not operating the route on an extended basis could subject the airline to losing the gate or route authority (though the FAA has relaxed this requirement);
 
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william
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:27 pm

JKzhong wrote:
Delta's break-even load factor is around 75-80% but they are currently flying at around 40-50% and are capped at 60%.
Wouldn't it then make sense just to leave the plane parked?
I'm thinking maybe it's about holding on to the market share? Or a lower than break-even load factor can still reduce cost (expected to be lowered to 30 m daily late june)?
Could anyone explain thanks!


Plane still has costs that need to be paid. Better to make 75 cents on the dollar than nothing.
 
teachpdx
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:28 pm

Many governments require airlines to maintain a minimum service... in order to receive bailout money, for example, US airlines had to keep serving all of their current cities or specifically request a waiver not to. And if airlines don’t maintain their routes into slot-controlled airports, they lose their slots.
Up Next: THIS YEAR IS CANCELLED!!!
 
davidjohnson6
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:28 pm

Many of the costs of running an airline are committed in advance. Employee salaries have to be paid, as do aircraft leasing and borrowing costs, regardless of whether a flight happens or not. Strip out all these costs and the direct operating cost usually reflects a rather lower load factor
 
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JKzhong
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:29 pm

Stitch wrote:
A couple of reasons:

1) Even at a lower than break-even load factor, if they have passengers wanting to fly, not operating the flight means they may go to competitors and not come back;
2) The plane might be needed at the destination to service another follow-on flight;
3) Not operating the route on an extended basis could subject the airline to losing the gate or route authority (though the FAA has relaxed this requirement);


Hi thanks that makes sense. But how about the cost on the other hand, wouldn't it actually increase the cost since it's lower than break-even?
 
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Stitch
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:31 pm

JKzhong wrote:
Hi thanks that makes sense. But how about the cost on the other hand, wouldn't it actually increase the cost since it's lower than break-even?


Trip costs are generally unchanging, though a lower operating weight will probably save a bit in fuel. But the financing payments on the plane remain whether it is flown or not. Same with labor (crew and airport/operations staff), airport gate fees (you will save on landing and navigation fees by not flying, but then you'd have parking fees), etc.
 
Ursula21
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:44 pm

Ed said because if they stopped then they wouldn't know when to restart. It's kind of melodramatic but I think there is a good point: by being out there flying and serving customers, they're able to see where real demand might be and adjust the business to meet customer needs.
 
MIflyer12
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 3:47 pm

JKzhong wrote:
Delta's break-even load factor is around 75-80% but they are currently flying at around 40-50% and are capped at 60%.


You're confusing marginal cost and fully allocated costs.

Marginal costs now are pretty low: due to the payroll protection elements of the CARES Act (which gave U.S. carriers $ Billions in grants) they need to pay employees, anyway. The marginal cost of labor is thus zero. Flying means fuel, variable maintenance, landing fees... and not much more. That's nowhere near a 75% break even.

Even beyond load factors, however, there's the question of average fares. It not just loads that are low - avg fares are low. Revenues are likely to be down much larger than passenger counts or RPMs.
 
mxaxai
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 4:00 pm

Break-even load factor is not constant. Some flights may require 95%+ LF to break even, others can get by with 40%. Load factor is just one variable, yield is also important.

Also, demand is highly time-dependent. Many people want to fly in the morning (to get to their destination) and again in the evening (to return home). So on the first outbound leg of the day, you might see a LF of 100%, but the return leg might be at only 40%. Then you have to operate another outbound flight 12 hours later, again at low LF, so you can operate a full flight home.

Btw, US carriers right now are required to serve all destinations they served pre-COVID (with few exceptions) regardless of load factor, the US government is (mostly) paying for that.
 
WorldFlier
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 4:57 pm

JKzhong wrote:
Delta's break-even load factor is around 75-80% but they are currently flying at around 40-50% and are capped at 60%.
Wouldn't it then make sense just to leave the plane parked?
I'm thinking maybe it's about holding on to the market share? Or a lower than break-even load factor can still reduce cost (expected to be lowered to 30 m daily late june)?
Could anyone explain thanks!


Define break even. If you can, at the current crisis moment, operate the flight on a positive direct operating cash cost basis (cost of fuel, staff, cleaning, etc.) you operate the flight...because CASH is king. Not operating a cash-positive flight means you continue to burn even *more* cash.
 
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nighthawk
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 5:06 pm

One of the most crucial things in business is cashflow. Even successful businesses can collapse if theres a drop in cashflow. Airlines are no exception, and they need people to be booking now and paying cash, in order to keep operating, it doesnt matter if the passenger plans to travel now or next year.

If you stop flying though, people will lose confidence and hold off booking, which disrupts the cash flow, and makes the situation a whole lot worse. Would you book a flight for August if the airline wasnt flying right now, but was just planning to restart in July? Or would you wait until they actually restart before booking? Many will.
 
nws2002
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 5:10 pm

In the case of Delta, they don't really have a choice at the moment. In order to receive the CARES act funds they have to maintain minimum service levels.

In general though, sometimes it is better to bring in some revenue than nothing. Let's use nice round numbers for this example. Let's say my costs are $10,000 to operate a flight, of which half are fixed costs (aircraft payments, facility leases, employee salaries, etc) and half are variable costs (fuel, crew pay, catering, etc). I sell $7,500 worth of tickets. At that point I've at least covered my fixed costs and a portion of my variable costs. So I have some cash coming in and can pull from cash reserves to pay the rest. If I park the aircraft and don't fly, I would still have to pay the $5,000 per flight in fixed costs from my cash reserves.

You are correct that eventually things will catch up and cash reserves will be down to zero. The hope is to limp along long enough to make it to the point where routes are profitable again.
 
BusBlitz
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 5:34 pm

Stitch wrote:
A couple of reasons:

1) Even at a lower than break-even load factor, if they have passengers wanting to fly, not operating the flight means they may go to competitors and not come back;
2) The plane might be needed at the destination to service another follow-on flight;
3) Not operating the route on an extended basis could subject the airline to losing the gate or route authority (though the FAA has relaxed this requirement);


I also thought it was because of Minimum Service Obligations.
 
FlyingHonu001
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 6:02 pm

Its not only a cashflow thing, DL has to maintain their partnerships with other companies that are based around their airports. No flights means less/no jobs for these people. Think for example: hotels for crew lay-over, cabin cleaning contractors, local airport apron staff, local airport security, catering contractors.
 
strfyr51
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 6:03 pm

JKzhong wrote:
Delta's break-even load factor istook almost 3 hours to move those bags ofaround 75-80% but they are currently flying at around 40-50% and are capped at 60%.
Wouldn't it then make sense just to leave the plane parked?
I'm thinking maybe it's about holding on to the market share? Or a lower than break-even load factor can still reduce cost (expected to be lowered to 30 m daily late june)?
Could anyone explain thanks!


It would depend on where.. While at United, every Christmas season we had 747's and DC10's leaving SFO at some pretty ODD hours like 0445 and 0340 making milk runs back east with virtually NO paying passengers and loaded to the GILLS with freight the company would even move container loaders from the major hubs to really strange places just to unload them, then after the season move them back to the hubs, other times? they had contractors unload the airplanes with large fork lifts with pallet baskets on them to roll off the LD3 and LD6 containers which they then trucked back to the hubs when they were empty. Once a cargo Supervisor told me that with a full belly of freight the passengers were "Icing on the Cake", as they were pure Profit because the freight was paying the bills. Every so often the USPS bidding happens and the Majors fight tooth and Nail to get their share of the contract because it's pure profit as all we do is load it and Unload it. I've even seen the US Mint ship Pallets of Money and Coin on commercial flights. and you KNOW it isn't done for FREE! So maybe? YES they can get by with a reduced load of passengers.. and right now? Airlines are going to have to fly essential routes as they got money from the Govt and Can't cut the routes to tide them over. and Can't cut the routes even if they'd like to.
 
Miamiairport
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 7:02 pm

The airline industry is a very cash intensive business. While the airline might not make money on an advance sale fare (assuming the airline doesn't make it up in ancillary fees) they have your cash for weeks or months before they deliver the service. Finance 101 covers the value of money in relation to time.

Most flights operate on very thin margins. It doesn't take but a couple of premium seats being sold to turn a flight from red to black. Also some routes like the DCA/LGA shuttle drive high worth flyers that value time. The airline might lose money on the shuttle but make it up on other flights.
 
LCDFlight
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 7:27 pm

I won't handle the COVID question because I have been out of the industry for a long time.

Airlines make route decisions on at least 4 time scales - short (dispatch, from like 10 days out to day of departure), scheduling (3m-12m out usually), fleet planning (once a year or so, the airline decides when to repair the fleet, expand or contract each fleet type, or to acquire a new type); and finally, long run strategy (Delta will hub at ATL for decades to come).

The point is, these decisions are all linked together on a "decision train," limited only by what they can physically and legally do with their fleet during the year. If airlines remove empty flights (which are rare) here and there will cause a string of logistics problems and the fleet will be out of place. Then the crews will be in the wrong place and the right mechanics will not be working on the right airplane at night. It is fairly easy to cancel a 2-leg trip out from a hub and back to the hub, if both legs are empty. But, that will make some customers mad.

The general answer in non-COVID times is, if a whole area of an airline's business is losing money, in the long term the airline should minimize or stop doing any prceossthat los e smoney, unless it enables them to make even more money. And I guess the COVID operations, which may lose money, keep the infrastructure alive so the airlines can make good money again in 2021. It's always about money (the customer's money, and what they want to hire you to do).
 
Ryanair01
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 7:31 pm

Basically there are different types of costs. I'll oversimplify this, but the basic lesson is true.

Firstly there are fixed costs, like aircraft finance (and to a degree staff) which have to be paid if you fly or not. So long as you cover the direct costs (e.g. fuel), you are better to fly 'at a loss'.

Think it through in a made-up example. Let us say fixed costs for a flight are $15,000 and the variable costs are $15,000. Break-even is therefore $30,000. If you earn $20,000 from selling tickets, your loss would be $10,000. However, if you stay grounded, your loss would be $15,000. So financially, your loss is reduced by flying, compared to staying grounded.
Last edited by Ryanair01 on Fri Jun 19, 2020 7:34 pm, edited 2 times in total.
 
LCDFlight
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 7:32 pm

I won't handle the COVID question because I have been out of the industry for a long time.

Airlines make route decisions on at least 4 time scales - short (dispatch, from like 10 days out to day of departure), scheduling (3m-12m out usually), fleet planning (once a year or so, the airline decides when to repair the fleet, expand or contract each fleet type, or to acquire a new type); and finally, long run strategy (Delta will hub at ATL for decades to come).

The point is, these decisions are all linked together on a "decision train," limited only by what they can physically and legally do with their fleet during the year. If airlines remove empty flights (which are rare) here and there will cause a string of logistics problems and the fleet will be out of place. Then the crews will be in the wrong place and the right mechanics will not be working on the right airplane at night. It is fairly easy to cancel a 2-leg trip out from a hub and back to the hub, if both legs are empty. But, that will make some customers mad.

The general answer in non-COVID times is, if a whole area of an airline's business is losing money, in the long term the airline should stop doing it, unless it facilitates making even more money somewhere else. And I guess the COVID operations, which may lose money, keep the infrastructure alive so the airlines can make good money again in 2021. It's always about money (the customer's money).
 
jplatts
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 7:49 pm

One reason why AA, DL, UA, and WN would operate an unprofitable route (even if the airline operation as a whole is profitable) is to remain relevant to a frequent flyer base in a hub or focus city market.

Another reason why AA, DL, or UA might operate an unprofitable nonstop route out of an hub or focus city airport is due to corporate contracts requiring nonstop service to certain destinations from a hub or focus city airport.

A third reason why AA, DL, UA, or WN would operate an unprofitable nonstop route is to provide connectivity to the rest of the airline's network from a small spoke station that the airline serves nonstop from only 1 or 2 hubs or focus cities.

There are also other carriers in countries other than the U.S. that operate unprofitable nonstop routes for similar reasons.
 
Pinto
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 8:53 pm

One thing to consider is the fact that it might be worth losing money on one flight to make it on another via a connecting passenger.
 
jetmatt777
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 9:49 pm

Quite simply, if you were laid off and needed to pay your rent would you accept a job making less than your old job, even if it's not enough to pay the bills? If your living expenses are $2000 a month and now you can only bring in $1200, it's better to do that and borrow $800 a month while cutting expenses, than to not work at all and borrow $2000 a month.
 
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lightsaber
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 9:54 pm

Ryanair01 wrote:
Basically there are different types of costs. I'll oversimplify this, but the basic lesson is true.

Firstly there are fixed costs, like aircraft finance (and to a degree staff) which have to be paid if you fly or not. So long as you cover the direct costs (e.g. fuel), you are better to fly 'at a loss'.

Think it through in a made-up example. Let us say fixed costs for a flight are $15,000 and the variable costs are $15,000. Break-even is therefore $30,000. If you earn $20,000 from selling tickets, your loss would be $10,000. However, if you stay grounded, your loss would be $15,000. So financially, your loss is reduced by flying, compared to staying grounded.

I believe this is the situation.

No matter what the airliners will lose money.
They must pay for aircraft leases.
Aircraft still need either maintenance or to be stored. Both cost money, storing just costs less per month, but there is a cost to extract the aircraft when done.
Either staff are laid off, or they are paid about the same working or not (until a certain hour threshold is achieved).
Fuel is rather cheap right now.

The big cost is engine maintenance (power by the hour or a differed overhaul cost) and airframe maintenance (probably on the clock with today's utilization).

I also agree with the argument that if you are not flying, customers must and will defect to the competition. Do to the lower costs, I believe the LCCs will gain market share during this downturn. They will be able to break even sooner and thus start expanding earlier. Until premium (business) traffic returns, all network airlines will lose money.

Lightsaber
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yzfElite
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 10:55 pm

There is also an argument that some routes need to be flown at a loss for a little while in order for them to be profitable later. That's often why the airline business requires such significant capital. After covid-19, some routes will need 'reopening' almost like a new airline starting up unfortunately.
 
NYCVIE
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Re: Why does airline fly at a lower than break-even load factor

Fri Jun 19, 2020 11:59 pm

Additionally, if possible it might be cheaper to operate aircraft with not many passengers than to park it and pay a heavy price to restore it to airworthiness.
 
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JKzhong
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Re: Why does airline fly at a lower than break-even load factor

Sat Jun 20, 2020 12:42 am

Hey thanks so much for the input guys it makes much more sense now!
 
Avgeek21
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Re: Why does airline fly at a lower than break-even load factor

Sat Jun 20, 2020 9:18 am

Could also be that they have to run it (due slot usage restrictions) or otherwise loose the slot. (non-Covid times) Whilst in reality they keep that slot not for the current destination & time but for a future new route or up the frequency to another destination. Many airlines then use that present slot to a high volume/yield, short distance destination anyways. Aka long term planning.

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