Comment:
Zero fares add up to better bottom lines

CAN airlines still make money while giving away free seats amid rising fuel prices?

But then again, the free seats are not exactly free.

"These airlines make money from the fuel surcharge, insurance surcharge, administration charges and baggage fee, which can add up to a substantial amount of money," a senior airline manager, who declined to be named, told Business Times.

At the same time, airport taxes and airport security charges paid by passengers, while collected by the airlines, are passed on to airport operator Malaysia Airports Holdings Bhd and partly to Express Rail Link Sdn Bhd, which operates the high-speed train service between the city and the KL International Airport in Sepang, he said.

Japan Airlines International Co Ltd senior director of sales and marketing for Malaysia and Brunei, Alan E. H. Tan, said while a free-seat fare might not generate any profit, it is better to have the seat filled by a revenue generating passenger which helps cover part of fuel costs.

Once a model used only by low-cost carriers (LCCs) like Ryanair and AirAsia, Malaysia Airlines (MAS) last week introduced its "zero-fare" seats for domestic flights, making it the first full service carrier (FSC) to offer free seats.

"When some airlines offer zero-fare seats, it does not mean it applies to all flights. This is basically on limited routes and these seats make up a small percentage of the total seats on offer," said Tan.

He added that airlines usually break even by filling up a certain percentage of aircraft capacity (depending on certain drivers such as market make-up and aircraft type), which means any seats sold in excess of that is profit.

"Also bear in mind that the surcharges such as fuel, insurance and administration fee are non-refundable.

"Given the restrictions on the change of dates or flight plans, payment for the surcharges will be forfeited if passengers cannot travel as per booking, which has to be made in advance at least 30 days prior to intended travel date," he said.

Additionally, these fares are only available online, thereby the airlines save on distribution costs such as the global distribution system (GDS) fees and travel agency commission.

Tan also said basically FSCs have a different business model with different cost structure targeting different market segments from LCCs.

"To make full use of available capacity, promotions are inevitable for exposure and market share maintenance.

"But at the end of the day, FSCs focus more on the business market rather than the leisure market and stress on safety, service quality translating into premium experience, on-time performance and good connectivity as priorities

compared with LCCs, which stress on strict cost control as its priority," said Tan.

For promotions, FSCs would normally offer early bird fare discounts than free seats where, for example, travellers can enjoy discounts of up to 30 per cent if they book three months in advance.

That's because they do not want their premium-fare passengers to find out that the person seated next to him has paid a completely different fare, and thus lose them.

"MAS is the first-full service airline to offer free seats or zero-fare seats," said Tan.