The economics of airline cancellation

United Continental says $35 million profit impact from Sandy

November 8, 2012

(AP Photo/Charlie Riedel)
Travelers on Delta Airlines look at a departure screen, in Detroit. Major airlines scrapped flights in and out of the New York area Wednesday, as the region gets socked with the second significant storm.

Cancelling flights may leave hundreds, if not thousands of stranded passengers, but doing it early pays off for airlines, especially in the case of recent superstorm Sandy.

Two of Chicago-based United Continental Holdings' biggest hubs - Newark, New Jersey and Washington Dulles - were directly in the path of Sandy. That’s why the airline said on Wednesday the storm cost it $90 million worth of revenue in October.

But - this is the important part - the airline also said that lost revenue will have a profit impact of just $35 million.

Airline industry consultant Bob Mann says that’s just the economics of what he calls “proactive” cancelation. By cancelling flights early, airlines avoid operational costs.

"They avoided a lot of costs. They didn’t fly, they didn’t burn fuel. So in some case they didn’t pay vendors," Mann said, via a very scratchy phone line from his home in Long Island, which is still recovering from Sandy.

Plus, the timing of this storm was fortunate in that late October to early November - basically, before Thanksgiving - is traditionally a fairly slow period for travel. That made it much easier for airlines to put stranded passengers on later flights. 

"So on a net basis, the results were still material, but significantly smaller," Mann said. "That’s really the math associated with proactive cancelations. 

How the rest of the year will play out is anyone's guess. The winter season hasn’t even started yet, and there’s no way to know how much more bad weather there will be.

As for Mann, not only is he dealing with Sandy, but he’s also cleaning up after the Nor’Easter snowstorm. Hopefully, that's not an indication of things to come.

"This is the first time I've ever had to shovel snow in November," he said.