In normal times, airlines try to maintain load factor -- the percentage of seats filled with paying customers -- at high levels. It's a no-brainer. The marginal cost of carrying an extra customer on a given flight (compared to letting the seat go out empty) is extremely low, so airlines have a strong incentive to fill as many seats as possible.
These aren't normal times, though. Air travel demand has plummeted in recent months due to travel restrictions and broad fears about the risk posed by the novel coronavirus. Rightly or wrongly, many would-be air travelers are concerned about being stuck in a cramped space with lots of other people for hours on end.
Delta Air Lines (NYSE:DAL) has responded with a variety of initiatives to make customers feel safer while flying. On Wednesday, Delta announced that one of those moves -- deliberately limiting load factors to give customers more space -- will continue through the end of September.
Leaving seats empty to give customers peace of mind
Delta first decided to limit load factors on its flights a little more than a month ago. At that time, demand was just starting to inch higher after bottoming out in mid-April.
Since then, the airline has been selling no more than 60% of the seats in most cabins on its flights (and no more than 50% for domestic first-class seats). This includes blocking all middle seats. On planes with 2 x 2 seating configurations, Delta has been blocking some aisle seats. The goal is to ensure that few if any customers are forced to sit next to somebody who isn't traveling with them.
Most of Delta's rivals are implementing much looser policies for onboard social distancing. As some airline executives and other pundits have observed, a typical aircraft seat is only about 18 inches wide. Leaving the middle seat empty doesn't come close to providing the six feet of separation recommended by the CDC. In any case, the International Air Transport Association argues that requiring all passengers to wear masks is a more effective policy "to reduce the already low risk of contracting COVID-19 on board aircraft" than keeping middle seats empty.
Delta's management acknowledges that the scientific consensus was just a "starting point" for creating the airline's social-distancing policies. However, in a recent interview, chief customer officer Bill Lentsch noted that offering more space and social distancing on board is making customers -- especially Delta's all-important corporate clients -- more comfortable about flying. In other words, capping load factors is a strategy to appeal to customers as much as it is a safety initiative.
Load factor caps will stay in place
When Delta Air Lines first announced that it would limit load factors to 60% in most cabins and block all middle seats, it said the policy would remain in place through June 30. On Wednesday, Delta said it now plans to continue this policy -- and other initiatives to reduce the risk of virus transmission -- until the end of September.
During May, keeping load factors below 60% was easy, as travel demand was still extremely low by historical standards. However, demand is starting to recover, albeit gradually, and will likely improve further as the peak summer travel season approaches. Passenger throughput at TSA checkpoints has more than tripled since hitting its low in mid-April, although the number of screenings is still down more than 85% year over year.
As such, enforcing a 60% load factor cap will require a little more work on Delta's part. The airline plans to "upgauge" flights to larger aircraft or increase flight frequencies on routes where rising demand is causing load factors to approach 60%. Given that the airline grounded about half of its fleet this spring, Delta has plenty of flexibility to add capacity back to its system.
Don't expect this policy to continue for long
Keeping middle seats empty and artificially capping flights' load factors will help Delta burnish its reputation and make people more comfortable booking tickets. Yet it's not a sustainable solution. Simply put, airlines can't make money if half of their seats are empty.
The load factor cap works in the short run because the variable costs of adding capacity are unusually low right now. Labor and fuel costs are airlines' two biggest expenses. Delta's labor costs are effectively fixed through the end of September: As a condition of receiving $5.4 billion of payroll support under the CARES Act, Delta is barred from implementing involuntary layoffs or furloughs through Sept. 30. If it doesn't operate enough flights to keep everyone busy, it has to pay employees to stay home. Meanwhile, jet fuel prices are about 50% lower than they were a year ago. Lastly, upgauging a flight from an Airbus A319 to an A321 (for example) increases capacity 45% at a very low incremental cost.
Thus, in the months ahead, Delta will operate somewhat more flights using (on average) slightly larger aircraft than are strictly necessary to carry however many customers end up flying over that period. Yet the incremental cost of these moves is quite manageable.
Come October, Delta Air Lines will have to choose between furloughing employees and paying them to operate flights that are only needed because of artificial load factor caps. And in the long run, as demand returns to normal, it would have to spend $10 billion or more to buy extra aircraft and incur billions of dollars of incremental annual operating expenses to return to 2019 traffic levels while keeping load factors low. (Delta's 2019 load factor was 86.3%.)
This isn't economically feasible. As a result, Delta is likely to loosen its load factor cap significantly this fall and eliminate it entirely within a year or less.