Realist, not conformist analysis of the latest financial, business and political news

Easyjet’s £15 Million Cost From Gatwick Drone Chaos

Easyjet has announced that it’ll be taking a £15 million hit from that Gatwick drone chaos – rather than a direct hit from the drone of course. There’s a fun little observation we can make here, one concerning the economics of an airline. Quite clearly Easyjet wouldn’t have made a £15 million profit if there hadn’t been that chaos. Or rather, those few days at Gatwick wouldn’t have made them that sum in profit.

Actually, they’re not even saying that revenue would have been that much. However, they are saying that much of the revenue loss is going to feed down into the bottom line near directly:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] EasyJet says the disruption to flights caused by the drone sightings at Gatwick airport in December has cost it about £15m. It paid out £10m in “customer welfare costs” and said it had lost £5m of revenues due to flight cancellations. EasyJet said the incident affected around 82,000 customers and led to more than 400 flights being cancelled. However, the carrier also said it had made a good start to the financial year and was “well prepared” for Brexit. [/perfectpullquote]

The point being that the marginal costs of running an airline aren’t large. Near trivial in fact – the fuel not burnt perhaps. The fixed costs of running one are large – crews expect their salaries, landing slots are owned, planes are leased and so on. All of those fixed costs carry on even without flights taking off. The relatively trivial marginal costs are the only ones that don’t.

This then explains the pricing model of the seats themselves. If there were no marginal costs at all then absolutely any price to fill an empty seat would be worth it. As the supposition isn’t true then nor is the conclusion. But £10 is worth it if the alternative is no £10 at all – the plane’s already going there, the crew’s on board etc. Which is why there are £10 flights at times – the airline business has near zero marginal costs and high fixed ones.

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