Don’t Let Governments Stop Cheap Air Travel By Using Coronavirus As An Excuse For Fare Restrictions

Travel should offer freedom and options but governments are using COVID-19 to regulate air fares. That will hurt low-cost airlines and protect legacy carriers, giving passengers fewer choices and more expensive tickets.

Creative airlines launch sales with seats costing next to nothing: Rome for a euro on Ryanair, Spirit’s $10 hop to Las Vegas, and Bangkok on AirAsia for a ringgit. That will end as governments require minimum fares, setting policy back decades to a highly-regulated era benefitting few.

Spearheading this anti-consumer change is Lufthansa. CEO Carsten Spohr secured a €40 minimum fare rule from Austria this week as part of a COVID-19 state aid package for his subsidiary carrier Austrian Airlines. Now he wants to expand the restriction.

“It’s good to end things that just don’t make sense, such as tickets that are too cheap,” Spohr said, according to Bloomberg. “In that respect I can imagine implementing these measures in other European locations.”

Lufthansa’s “too cheap” proclamation is self-serving and ignores the spectrum of airlines, and business models, benefitting passengers. The real issue is Lufthansa’s old world mindset.

The contentious inexpensive fares are not really tickets but marketing expenses. Lufthansa and other legacy airlines regularly pay for costly ads in print and television, sponsorships, and travel agency commission fees, amounting to 23% of Lufthansa’s expenses, according to its annual report.

Low-cost airlines make less use of those expensive mediums and instead let promotions generate word of mouth and attract bookings. Marketing and distribution comprise less than 8% of costs at Ryanair, Europe’s largest airline.

Lobbying for fare minimums is thinly-disguised way to disadvantage marketing efficiency at low-cost airlines.

Ryanair calculates it spends only €4 per passenger in sales, marketing and other costs. Lufthansa tried making its Eurowings subsidiary a low-cost airline but could not shake its expensive habits. Eurowings spends €28 per passenger according to Ryanair’s benchmarking.

Pricing freedom is so important that China removed fare minimums a few years ago in order to kick-start low-cost competition. That birthed a new airline choosing the name Jiu Yuan, meaning nine yuan – the starting price for its fares (RMB9/$1.27).

Allowing cheap tickets, Spohr argues, “doesn’t make sense ecologically or economically.”

But airlines do not set out to lose money. They are for-profit companies. Ryanair is more successful than Lufthansa, so much so that Ryanair is largely navigating the COVID-19 downturn on its own reserves with a £600m U.K. loan. Lufthansa needs the world’s largest aviation bailout at over €12 billion.

The €40 minimum, including taxes, removes choices. Lufthansa gives a complimentary half-sandwich that passengers routinely criticize for lacking quality and quantity. EasyJet does away with mediocre free food, lowering costs.

Lufthansa celebrates a €40 fare minimum but last year justified even cheaper tickets.

“We do not sell tickets in Europe for 35 euros one-way for simply profitability reasons,” then-CCO Harry Hohmeister said. “The idea is to have a push effect, to upgrade through the lifetime cycle.”

Under Lufthansa’s own logic, an initial cheap fare could see passengers buy higher-margin add-ons. Or Lufthansa offers inexpensive tickets in hopes of winning the passenger over a lifetime.

Regulating minimum fares distracts from a real issue. The Lufthansa Group dominates routes between its hubs, like Brussels-Zurich and Vienna-Frankfurt. Lack of competition forces fares up.

Flying between Brussels and Zurich makes passengers captive to Lufthansa carriers Swiss and Brussels Airlines. A spot check on fares puts starting prices at $124. But flying to Zurich from London, where there are more non-Lufthansa options, is only $68 despite London being 64% further and having higher taxes.

Lufthansa should not throw rocks from its government-subsidized glass house.