When British Airways and Virgin Atlantic declared the latest ticket
bloodbath there was one sound that could be heard above the cheers of
the consumer - the weeping of the accountants. What is a bargain for
travellers is a headache for the airlines - yet they are drawn into a
vicious fares war on their lucrative routes almost every year.
Return fares such as pounds 139 to New York, pounds 167 to Los Angeles
and pounds 279 to Hong Kong are among the lowest ever sold and Virgin
chairman Richard Branson cheerfully admits ’it could cost a fortune’.
Even so, it is a strategy that BA chief executive Robert Ayling seems
willing to endorse.
But are the airlines damaging their long-term ability to raise fares and
tarnishing their brands by plunging into the bargain basement? And how
much do they really lose?
Balancing the fares
Whenever airlines declare a fares war or a burst of seasonal special
offers they never reveal to the public or the investment community how
many thousands of seats are going on sale at precisely what prices.
The marketing and accounting teams have to strike a balance between
putting enough seats on offer at the lowest prices to make the sale
’genuine’, and making too many available, thus squandering the chance to
extract the highest price the market will stomach.
Mike Stoddart, transport analyst at stockbroker Charterhouse Tilney,
says that the City has always found it impossible to calculate exactly
how much it costs airlines when they go on a discounting binge.
If, despite the banner headlines and talk of fighting rivals to the
death, the fares war is not allowed to spiral downwards too deeply or go
on too long, then BA and Virgin will probably both benefit. In other
words, it will be a phoney war with more gain than pain.
Both airlines will win passengers from other airlines that put fewer
seats on sale and less muscle into advertising. They will fill seats,
albeit at bargain fares, that otherwise would have flown empty or
carried a passenger using up frequent flyer points, which brings in no
And any revenue is good revenue to an airline in the depths of
But gain certainly turns to pain if the market weakens by more than just
a seasonal blip, or two airlines are actually trying to put each other
out of business. (And BA has probably accepted by now that Virgin
Atlantic, which made pounds 90m profit last year on a pounds 942m
turnover, is not just conveniently going to disappear.)
Out of BA’s pounds 637m operating profits for the 1996-97 financial
year, pounds 317m (47%) was earned in July, August and September.
Only pounds 30m of operating profit was earned in the January-March
Figures for the financial year 1997-98 were distorted by the summer
cabin crew strike that cost BA pre-tax profits of pounds 125m.
Nevertheless, July-September operating profits were still pounds 200m,
while the January-March trough brought in only pounds 76m. Passenger
numbers were 20% down in December compared with August, so even fare
wars have only a limited effect on volumes.
It might seem logical for airlines to stay out of the bloodbath by
operating fewer, fuller flights during the winter, thus preserving their
fares structure and exclusive image and saving on adspend. But that is
According to Stoddart: ’The aircraft are sitting there and the airlines
suffer the financial charges of owning them whether they fly or not.
That could be a monthly leasing charge or the depreciation and interest
cost if they have the equivalent of a mortgage on the planes. The staff
are there too, being paid. So most of the fixed costs stay the same.
’The flights have to operate for the business passenger, who demands
frequency and is paying full fares. For the extra amount it costs to
carry each economy passenger, in terms of airport landing charges, fuel,
in-flight meal, check-in, it is better to earn pounds 200-odd for the
seat than fly it empty.’
The latest fares war is being blamed not only on the slump in traffic at
the end of the summer but also on rapid capacity growth as airlines take
delivery of aircraft ordered years ago. BA’s capacity has been rising at
a rate of 12% this year. Turmoil in world markets and the whiff of a
recession are adding spice to the conflict.
But airlines have been reaping the benefits of the strong UK economy
over the past two years by putting fares up in the limited-capacity
business- and first-class cabins. The American Express Corporate Travel
Index shows that average business class fares out of the UK in this
period have risen by 19%.
Transatlantic business-class fares have risen by 23%, with a London-New
York business return fare typically costing pounds 3100. First-class
costs around pounds 5000 while passengers in economy on the same Boeing
747 could have paid anything from pounds 850 down to the lowest
Keith McMullan, managing director of London consultancy Aviation
Economics, says: ’An airline such as BA will have dozens of different
fares on a jumbo to New York, often on sale as much as six months in
advance. They will tweak the selling process right up to the last minute
to achieve the maximum revenue - deciding how many seats to make
available at what price and when.
’It is inevitable that someone on a bargain fare will sit next to
someone who paid twice as much, but each one is likely to have different
conditions attached to the ticket.’
Companies do not discuss breakeven points openly and City analysts say
that the best airline capacity-planning and fare-setting systems mean
that it differs from flight to flight even within one airline and to the
It is generally agreed that once an airline such as BA has filled its
first- and business-class cabins with full-fare paying passengers it has
more than covered the cost of the flight, and tickets sold in economy
are straight profit. A fares war, or seat sale, is simply a way of
maximising return at the margins.
Chris Avery, aviation analyst at Paribas, says: ’At this time of year as
the summer peak wanes, airlines always sell off seats at the back of the
plane. They have more control if they conduct the ’fare wars’ themselves
rather than sell the cheap seats to the bucket shops. They have better
control of the marketing and the price and quantity of seats sold at the
Extra competition has entered the short-haul market in the shape of new
low-cost airlines such as Ryanair, EasyJet, AB Airlines, British
Regional Airlines and BA’s new offshoot Go. They are pushing fares as
low as pounds 29 to Ireland and pounds 99 to Italy and Scandinavia.
Most of these are in the process of raising their aircraft capacity,
which increases the pressure on economy fares. There is always some
element of trading down by price-conscious consumers, particularly in a
recession when business-class passengers downgrade en masse to
On the whole, autumn price wars will not impede an airline’s ability to
charge high fares in a strong market. There is no evidence that winter
discounts drag significant passenger numbers away from the high-spending
Bargain fares prompt some changes of habit but the most significant
effect is to expand the market, draw in new passengers and increase
Most observers do not believe that fare wars damage brand image,
provided they do not spiral out of control and quality and safety
standards remain high.
’BA is such a big company that it always has to have a fare out there
that will appeal to everyone who is likely to fly - whether that’s
pounds 6000 on Concorde or pounds 180 for a heavily-restricted leisure
ticket across the Atlantic. If you need flexibility and want luxury you
still have to pay for it,’ explains Stoddart.
Joanna Walters is transport business editor for The Observer
- Passenger volumes in August are normally 20% higher than in
- Once first- and business-class seats have been sold any other seats
are pure profit
- Current fares are some of the lowest ever recorded: pounds 139 to New
York, pounds 167 to Los Angeles and pounds 279 to Hong Kong
- Prices on the same plane vary massively. London to New York can be
pounds 5000 for first class, pounds 3100 business, pounds 850 standard
and pounds 139 discount Business fares up 20% 1996-98.