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US DOT rules could be detrimental to smaller airlines

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Covid-19 has created unprecedented challenges for the airline industry, with many flights unable to operate and whole fleets being grounded. Multiple scenarios have been forecast, with the aim to predict the impact that Covid-19 will have and how travel companies can plan to mitigate the impacts and disruption it will cause.

IATA’s previous prediction of a loss of $113bn to the airline industry in early March is now out of date, further predictions estimate revenues could plummet to $315bn, a drop of 55% compared to 2019’s level.

Amid Covid-19, many airlines have waived cancellation or change fees, encouraging customers to rebook their trip for a later date. However, customers have experienced difficulty in obtaining said travel vouchers, causing confusion and frustration.

The US Department of Transportation (DOT) has recently issued an enforcement to airlines, stating they must offer refunds for flights that have been cancelled. Due to the current situation, contact to airlines is limited and is only advised if the intended departure date is in the near future.

Refunds eat into airlines cash reserves

Cancellation and change fees have been a solid revenue stream for airlines. Offering a refund guarantees no further obligation for the customer to use the airline they booked with and requires airlines to give cash back to the customer, eating into their cash reserves. Waiving cancellation fees is the most viable option for airlines, as it holds the revenue already gained and guarantees their trip will be made at some point in the future.

Whilst most airlines are operating at a loss during the pandemic, the ruling by the US DOT will put them into further financial difficulty. This is especially the case for smaller, low-cost carriers, who are less equipped for an external impact of this scale, and have built their business model around non-refundable, cheaper fares.

JetBlue, a low-cost carrier based in the US previously had restrictions on gaining refunds for cancelled flights before the ruling. Already operating at a daily loss, mandatory refunds will push JetBlue further into the red.

An airline’s response is important for its image

In response to the enforcement, airlines offering an easy cancellation scheme will be likely to retain their customer base post-Covid-19. As many airlines and travel companies have halted marketing spend amid the pandemic, maintaining market presence is important for the duration. Negative media coverage around cancellation policies could be detrimental to airlines future brand image post-Covid-19.

Traveller priorities will change after Covid-19, and their focus will be on flexible booking and enhanced cancellation policies. The uncertainty regarding the future of tourism will be a factor that lasts, as travel insurance policies cover is limited upon external, unpredictable impacts such as Covid-19. Airlines will have to prioritise a restructuring of their policies and wider business model because of this, which may not be possible for smaller airlines that rely on strict cancellation policies as a key revenue stream.

For more market data and analysis visit GlobalData's Travel & Tourism Intelligence Centre.

Image: GagliardiPhotography /

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