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The past decade and change has seen a remarkable phenomenon in the air-travel market: airline revenue and profits soared, but international flights became cheaper than ever.
Years ago, it was rare to find cheap flights to Europe, barring promotions or pricing errors.
But in recent years, inexpensive flights have become the norm. Even before the rollout of basic economy class, flights from the US to Europe and South America and Asia could routinely be found in the low hundreds of dollars. And passengers could book flights to Asia, the Middle East, and Africa for just a little more.
The lowest fares might not always be available on the busiest travel days or throughout peak seasons and booking times, but it’s still routinely possible to find flights from the East Coast of the US to Paris, London, Amsterdam, and more for around $300 or less.
But finding the best prices could be tricky; there wasn’t always a rule on when or how far in advance they would become available. Some online media companies have emerged, offering newsletters, alerts, and digests that surfaced the latest and best fares.
One of the best-known among them is Scott’s Cheap Flights, a service founded in 2013 by the former journalist Scott Keyes, after he happened to find a cheap flight to Milan for under $150. Since then, Scott’s work has evolved into a massive email subscription service with more than two million members globally and more than 30 employees.
This reporter has been a Scott’s Cheap Flights member for years, and has taken several trips using flights found on the platform.
But as the pandemic has decimated airline route networks, brought travel demand to a virtual standstill, and led airlines to cut capacity, it’s easy to wonder whether the flight market will be recognizable once travel comes back in full force.
We spoke with Keyes to get his thoughts on how the economics of airfare will change on the other side of the pandemic.
Cheap flights will abound in the coming months
Scott’s Cheap Flights
In the short term, as airlines try to drum up demand and various restrictions and shutdowns are lifted, discounts, sales, and specials are likely to be abundant.
“Cutting fares is the single biggest lever airlines can pull to try and entice travelers,” Keyes said during a phone interview. “With advance bookings so far down, they’ve already been slashing the fares for flights in July and August, and around Christmas.
Travel demand has already begun to recover, albeit slowly and far below levels that airlines need in order to stop burning cash. However, Keyes noted that with people still anxious about travel, airlines can use a combination of cheap fares with messaging about steps they’re taking to help prevent transmission of the coronavirus.
The deals and sales can be useful for attracting customers who are ready to go to the beach or a national park after months in quarantine, or people looking to visit friends and relatives. But they’re likely to have a greater impact once cities and other destinations begin to reopen in earnest. Ultimately, the airlines’ recovery, and those initial cheap fares, are a function of demand.
“An airline can offer a $10 flight to a place in the US, but that alone won’t induce demand,” Keyes said. “For most people, it’s a question of whether they feel safe on a plane, how safe the destination is, what do restrictions look like there.”
“People need to feel safe getting to a place before they’re willing to leave their home and go somewhere,” he added.
The cheapest fares in the world won’t be enough to bring back demand, Keyes said, unless there’s actually something to do at the destination.
As airlines have returned some capacity to the market, they seem to agree. American Airlines said it added flights for July based on where beaches and national parks were open — both leisure facilities that can theoretically operate while enabling social distancing — which an increasing number of customers were searching for on its website.
The airline also said it had planned to add flights to Florida as theme parks reopen.
The longer term: Why those $300 flights to Paris will return.
In the longer term, as demand picks back up, airlines recover, and the pandemic wanes, Keyes thinks the cheap international fares travelers grew accustomed to during the 2010s — like $300 round trips between New York and Paris — will come back.
The dynamics of supply and demand may be disrupted as COVID-19 testing expands, countries lift their entry restrictions, and cabin fever-afflicted travelers leave quarantine and seek to travel again. This should stabilize as airlines bring stored planes back into service and demand gradually returns.
“There’s always a little bit of chicken and egg with airlines and travelers,” Keyes said. “To what extent is demand induced” by availability and price, he added.
Throughout and after the airlines’ return to normal, those cheapest fares should continue to be available, he believes, partly thanks to new revenue models.
“The way that airlines have generated revenue has shifted over the past decade or two from a model where they primarily generated their cash from sales of economy tickets, to one where they’re generating the majority of their cash from other sources of revenue,” he said.
That includes a focus on higher-margin premium seats in first or business class and premium economy, upsells like bag fees and extra legroom in the economy cabin, and revenue from frequent-flyer programs. Those loyalty programs generate cash through a number of channels, but primarily the sale of frequent flyer miles to airlines’ credit card partners, which issue them as spending rewards.
Those credit card partnerships bring in billions each year for airlines — United recently mortgaged its frequent flyer program, which it valued at about $20 billion, for a cash loan.
In order to generate revenue, those frequent-flyer programs need members to be engaged, and loyal enough to the airline brand to spend on a cobranded rewards credit card. Making the cheapest seats on the plane accessible to a wider number of people with low fares is one of the many ways an airline can do this, Keyes said. That makes the lower margins airlines earn on those cheap tickets more worthwhile.
“In a sense, all of those sources of revenue are subsidizing the cheap economy tickets,” he said. “That’s why I expect that dynamic to continue once we’ve beaten the virus and travel starts to return to normal.”
A major caveat: The potential collapse of Norwegian Air
According to Keyes and other industry watchers, there’s one possibility that could wreak havoc on the cheap trans-Atlantic flight market: a potential collapse of ultra-low cost carrier (ULCC) Norwegian Air.
After several high-profile bankruptcies of ULCCs in recent years, including Primera Air and Wow Air, Norwegian has remained the only major player in the space, with several smaller contenders such as Level and French Bee.
Norwegian has remained more financially viable and built a somewhat more sustainable model than its failed competition, but the airline still operates on extremely tight margins, and the pandemic’s impact on international travel could prove devastating.
Norwegian Air’s shareholders recently approved a survival plan, and the airline received a bailout from Norway’s government. That, combined with drastic workforce reductions, means the airline has some breathing room as it waits for conditions to improve.
Scott’s Cheap Flights does not typically alert subscribers to low fares on Norwegian since those are commonplace; the service sticks to low fares on mainline carriers as part of its value proposition. But Keyes said the airline’s presence in the market drives down the lowest prices at the larger airlines.
“We owe a real debt of gratitude to airlines like Norwegian and Wow,” he said. “Even if we don’t fly them, they set a price for the cheap trans-Atlantic fares that you see now on full service airlines” looking to compete, he said.
The same would hold true if a major airline were to collapse, according to Henry Harteveldt, a travel industry analyst and consultant with Atmosphere Research.
The reduced competition, and reduction in pricing pressure from the low-cost airline, could lead to airlines seeking higher margins on the cheapest coach seats.
“That’s why airlines like Norwegian and Level help make airfare more affordable on airlines like British Airways or United,” Harteveldt said. “This pricing pressure on the industry is great for consumers.”
Read the original article on Business Insider