A spot of sunshine amidst the COVID-19 airline gloom?

Spain’s beaches are once again open for business

At the end of May, Spain confirmed that it would welcome UK tourists back from the start of July and last week the UK lifted its quarantine restrictions for travellers returning from most countries in Europe, including Spain.

Spain is Britain’s biggest tourist destination and airlines are ramping up their schedules, with many Britons seemingly anxious to escape the COVID gloom and the unreliable British weather and head for the beaches.

Let’s take a data driven look at how things are going on the main London – Spain markets. My thanks go to Pablo Fernandez for assistance with data extraction and visualisations.

Airline capacity ramps up

Although airlines have begun to resume flights and capacity is being progressively increased, it remains significantly below normal levels at what would usually be peak season. For the London-Spain market, published capacity for next week is 74% below the same week last year.

Published schedules show capacity rapidly increasing in the next few weeks with capacity for the first week of August only 20% below last year. Some smaller markets show capacity almost at last year’s levels.

However, published schedules look very unreliable, even four weeks out. For example easyJet are publishing schedules which suggest they will grow compared to last year.

That is clearly not what is going to happen. As recently as June 24th, they guided the market to an overall system capacity for the July-September quarter at 30% of the planned pre-COVID-19 capacity. To hit that number would require 66% of the published flights for the period from 20th July to the end of September to be cancelled. Frustrated customers have noted that the airline is delaying cancelling flights until the last minute, presumably to avoid the need to provide refunds, instead showing flights on their website as “sold out”.

I’m sure there will be downward adjustments made to other carriers published schedules too, but the gaps to the likely reality look much smaller. I’d guess that capacity on London-Spain for August will end up down about 50%, but that depends in part on how bookings go over the next few days and weeks.

Will there be demand to fill the seats?

There do seem to be some encouraging signs of returning demand. UK interest levels for flights to Spain on Kayak were running at 90% below last year during the lock down. But the figures have been improving during June and were only 34% down last week.

Google searches show the same pickup, although it is only really evident on Alicante, Barcelona, Ibiza, Malaga and Tenerife.

But even if bookings are now picking up, all airlines will be missing many bookings that should have been taken in earlier weeks.

Price war or price hikes?

One of the big questions has always been whether airlines would dump prices in order to make up for lost time and stimulate traffic, or whether prices would rise as airlines deal with the additional costs of new procedures and capacity restrictions in the new environment.

As usual, Ryanair have predicted a price war, something they do as a matter of course in difficult times. “When this thing is over there is going to be such massive discounting going on that there will be a large spike upward in travel and tourism for a period of time.” O’Leary knows that statements like this will generate headlines and free publicity for his cheap fares, and perhaps also deter nervous investors from providing finance to prop up less financially strong competitors.

Let us look at the evidence so far on flights from London to Spain. On the 6th July, I looked at prices selling on Expedia.co.uk for a return flight from London for twelve of the biggest markets. The itinerary was for outbound on the 1st August and back on the 10th.

Let us look first at the minimum round trip available fares to get an idea of “how low” each of the carriers was prepared to go.

Immediately evident are the low prices for all carriers for both Barcelona and Madrid, two markets which in normal times have a strong business market and a lot of capacity.

On the big tourist markets of Malaga and Palma da Mallorca, easyJet are offering some very low lead in prices, generally on their less attractively timed flights. However, most of the itineraries on sale are at much higher prices, as shown here looking at the average fare version.

You can also see the different pricing approaches of the three biggest carriers, British Airways, easyJet and Ryanair. Averaging across the markets, British Airway’s prices are 59% higher than easyJet’s, which in turn are 19% above Ryanair’s.

How do these prices look compared to usual?

Unfortunately, I don’t have comparable data for what pricing looked like on these markets at the same time last year. easyJet’s average passenger yield per round trip for the July-September quarter in 2019 was £128. So an average fare of £229 looks very high. However, we are only really seeing the late booking part of the yield curve, which is always a lot higher than the average as many seats are usually sold early at much lower prices.

The equivalent figure for Ryanair’s July-Sep quarter in 2019 was £92 of fare revenue per round trip, so Ryanair’s current average fares to Spain of £193 are slightly more than double that.

BA certainly have a few lower lead-in fares, but with an average round trip fare of £363, they are clearly going for a yield maximisation strategy at this stage. The decision to concentrate flights at Heathrow may also be limiting their ability to compete on price, with per passenger airport fees much higher at Heathrow than at other London airports.

In conclusion

My overall conclusion is that carriers seem to be trying to keep late booking yields relatively high. easyJet are trying hard to stimulate volume on the big markets with some good headline prices, but are also trying to protect yields by restricting availability to their least attractively timed flights.

That is positive for yields but I think the upturn in bookings won’t be enough to fill all the flights now on sale and we will see some significant cancellations closer to departure, especially for easyJet.

Of course, there remain many more deeply troubled parts of the market. Business traffic will not return in September as strongly as it normally would. Also troubling for long haul airlines, top markets such as the US, India and China remain subject to travel restrictions and recent news from the US suggests that isn’t going to change any time soon. That doesn’t bode well for Virgin Atlantic’s rumoured £900m rescue deal.

So even if capacity and volumes will be significantly down on last year, the UK-Spain market does seem to be a somewhat sunnier spot amidst all the gloom.