As fuel prices take off, Avelo wrestles with keeping fares low
Getting a new airline off the ground at any time is no easy task, but doing it at a time when fuel prices are taking off is a real challenge.
But that’s what is facing Andrew Levy, chief executive officer and co-founder of Avelo Airlines, a low-fare carrier serving Connecticut out of Tweed-New Haven Airport.
Avelo currently flies to six destinations from Tweed, including Tampa, Orlando and Fort Lauderdale. The airline will add seven more destinations more including Chicago, Nashville and Baltimore - between now and end of May, when the traditional summer travel season starts in earnest.
It’s true that travel is up as the pandemic is over in the minds of most people, though that’s still a challenge as well. Added postpandemic demand, the general rise in inflation especially for fuel, the busy travel season and the war in Ukraine are all hitting the industry at the same time.
In a recent interview, Levy spoke about the challenge of competing against established airlines by keeping fares down at an airport that’s not on the radar of many travelers.
“Higher fuel prices are probably here to stay for the indefinite future,” Levy said. “Part that is the war, but part of it is that we’re in a very strong economy,” he said. “If you start to see demand dropping, fuel prices will go down. But until that happens, you can expect to buckle up and be prepared to spend a little more.”
Levy said during meetings with his team that is responsible for setting prices “we’re taking up every single price.”
“But our customers are price sensitive,” he said. “And while we get more revenue per person, we get fewer people.”
An alternative to raising prices, Levy said, is reducing the number of flights on less popular travel days.
“You look at the worst day from a revenue perspective,” he said.
Avelo’s prices are tied to fuel coming out of New York Harbor, he said.
“I’ve never seen prices like this; it’s crazy, it’s absurd,” Levy said. “There’s high prices and then there are New York Harbor prices. Our prices at start of the year were $2.50 a gallon; now we’re paying $4 per gallon.”
Domestic airfares are up 40 percent since the beginning of the year, according to a report issued last week by Hayley Berg, an economist at Hopper, a Montrealbased company with an app that
tracks ticket prices.
The average domestic airfare in the U.S. is now at $330 round-trip and would increase to $360 if Berg’s projections prove to be correct. If that occurs, it would be the highest average domestic round-trip airfare since Hopper began collecting data in 2013, a company spokeswoman said.
Connecticut specific domestic airfare averages weren’t available from Hopper.
For Avelo, the increase in fuel prices has added another $22 per seat on flights from Tweed to Florida, Levy said. Factor in other costs and “at the end of day, it’s about $30 more to fly one way,” he said.
“No matter what kind of airline you are, you’ve to to take your price up, but you can’t do it overnight,” Levy said. “But if you take prices up, there’s going to be some demand destruction. So you either increase it gradually over time or you cut seats in the market.”
And that has a cost, as reducing the number of seats on a particular route drives up the cost, he said.
Larger airlines such as United or Delta have the option of swapping out bigger planes with those that have fewer seats on regional routes. That’s not an option at this point for Avelo, which flies 737 planes out of Tweed.
So to reduce the number of seats available to travelers, “you might see fewer flights on less popular days,” he said.
“You are always looking to see
what is the worst day from a revenue perspective,” Levy said.
Another option is to reduce the number of seats sold at the lowest prices. Back in March, for example, “you might have had a $49 fare,” Levy said.
Berg, at Hopper, said jet fuel prices have historically accounted for 30 percent of an airlines’ operating expenses, usually the second biggest cost after labor. Airline prices are expected rise at least another 10 percent through the end of May, she said.
Berg said going into June, “airfares should seasonally decline into the fall shoulder season.”
Michael Boyd, president of the Colorado-based airline consultant Boyd Group International, said the effect of fuel prices comes in layers as it permeates the market.
“They start by selling fewer cheap seats,” Boyd said. “If you’re booking for September, plan on airfares being much higher, perhaps as much as 10 to 15 percent higher.”
You have to be an optimist to launch a new airline and Levy is no exception. With inflation driving up prices for virtually everything consumers purchase, he said people are adjusting what they are willing to spend money on.
“The nice thing about travel is that even though it’s discretionary,” he said, “it’s something that drives so much satisfaction that it will be one of the last things that they will cut.”