When the pandemic hit the world in early 2020, air travel came to a halt as people stayed home and most travel came to a halt. Over the past two years, a number of predictions have been made about the return of business travel. Delta Airlines recently announced commercial revenue for 2019 but on lower volume and higher prices. Every day, the media reports on employees returning to the office and how different companies have different views on what that means.
The effect on America’s largest airlines cannot be underestimated. Before the pandemic, business travel for these airlines accounted for approximately 20% of their volume but more than 50% of their turnover. With business travelers paying three to four times the fares of leisure passengers, America’s largest airlines face a daunting challenge if structural changes in this type of travel are permanent. Here are five ways airlines might need to change to address this issue:
Since the pandemic first hit, airline schedules have focused more on leisure destinations because business travel was so uncertain. Now, with approximately 75% of domestic business volume in 2019, major US airlines need to think about the right balance of schedules. It’s not that some routes are all business or all leisure, since each route carries a part of each. The proportion is of course different, and for routes with a lot of business trips, it is often the frequency that wins the traveller. That’s why Southwest Airlines carries so many small business travelers in particular.
For the three largest US airlines, frequency on any route is not just a matter of the mix of business travelers, but also the ability to connect at a hub. When an American Airlines plane arrives at Denver DFW Airport, it will be ideally scheduled to meet many other flights, giving customers the ability to connect to many places. But United Airlines travel on the same route would require those connections to occur in Denver, as that is a United hub and DFW is just a radius.
As the volume of business travelers becomes clearer, it is likely that some frequencies will have to be removed. This would free up aircraft time, which could be used to fly on other routes, airlines could simply reduce overall asset utilization or retire their less efficient aircraft. What is clear, however, is that a schedule built on pre-pandemic business traveler demand patterns is not the schedule that will be optimized for the post-pandemic world.
First class was once the most luxurious product offered by airlines. But this product is rapidly fading, as those willing to pay for this product have largely disappeared or turned to private aviation. The largest US airlines today use a three-class model, with a standard coach, premium economy class and business class. Domestically, some still call this first class, but no one confuses that with how the interior cabin compares to long-distance international travel. The proportion of these, much like the calendar itself, is largely based on pre-pandemic volumes and demand.
Premium Economy takes over to replace business class, or domestic first class, too. It offers more leg room than the standard trainer, but not much else in most cases. But for most US domestic travel, that perk is what most people appreciate, and the price for the exclusive business class cabin doesn’t make as much sense. Additionally, many were annoyed to pay for domestic first class and then demanded to pay $19 or more for slow Wi-Fi.
For most domestic travel, airlines will likely need to reduce the business/first cabin in favor of premium economy class, and densify the standard coach cabin even further. That means adding an extra row or two of seats, and with a larger percentage of passengers coming from price-sensitive leisure travelers, that makes sense. Changing cabin configurations is expensive and time-consuming, so airlines won’t make this change quickly or lightly. But as post-pandemic demand sharpens and business travelers stabilize at 80% of 2019, some will take this step to better adapt their fleets to new demand patterns.
Large airline sales forces typically have two primary goals: earning travel spend from corporations and earning a disproportionate share from travel agents. These teams work well when battling for business in contestable cities, such as those that may be serviced by several different airline hubs. Kansas City, for example, could likely use Dallas, Atlanta, Chicago, or Minneapolis for connections where nonstop service is not available. By offering fare reductions and perhaps special treatment of employees (automatic elevation in the loyalty program, for example), a company in this type of city may choose to direct its traffic to a single airline.
A hub creates more challenges. Delta Airlines operates a large hub in Atlanta. For one thing, Atlanta businesses really have no other choice of airline if flying to multiple destinations, since Delta offers the most nonstop flights to most destinations. However, if a company has an operation in Atlanta and Houston, United may be a reasonable choice as it would fly nonstop on the route that company uses most. An airline sales force that offers deep discounts in its own hub runs the risk of significant revenue dilution. Trying to encourage travel agents to direct traffic to the airlines where the agent is paid the most is a game that may work for short periods of time, but is often matched by other airlines and eventually increases costs without generating new revenue.
An airline performance manager would tell you that it’s common for a sales team to push the revenue management team to offer their customer fares that wouldn’t otherwise be offered. But this same manager will tell you that he hardly ever receives a call asking him to increase a price, because he can get his client to pay more. This is the problem with most airline sales forces – they are often rewarded for revenue which may not be in the interests of the airline selling.
Budget airlines often have little or no sales force because they sell on price and do not focus on attracting business travellers. As major airlines grapple with structural change in business travel, they will need to rethink the size and focus of their sales force. By doing so, they likely have the opportunity to spend less on people and discounts since the volume of business travelers is reduced. However, with less business travel overall, the fight for business travelers in questionable cities could heat up.
The economy of major airline loyalty programs has been driven by the “road warrior,” or business traveler who flies several times a month. With companies traveling less, loyalty programs need to recalibrate and expand their network to become relevant even to the occasional traveler. Recent changes to give credit card spending more equal weight to flight spending go in that direction. However, there is a longer term risk here.
Banks have agreed to pay airlines for points the bank can issue for credit card spending. By doing so, they hope their card will be used more often since the user can earn free trips or upgrades even when buying groceries and gas. What banks are willing to pay may decline over time, if they feel that the aspiration to free travel risks losing some of its appeal. With leisure traffic not experiencing the same structural change as business travel, it is also possible that banks will find their affinity card becoming even more valuable.
What is clear, however, is that loyalty programs, like seat configurations and flight schedules, have been structured and priced based on pre-pandemic travel patterns. As leisure travel or “bliesure” travel (business and leisure travel combined) represents a larger share of total passenger volume, loyalty programs will have to adapt.
In almost every scenario, major US airlines need to focus more than ever on controlling overall costs. Indeed, labor costs represent a higher percentage of total costs and low-cost airlines are growing at a faster rate, which means that pressure on prices will continue for the most travellers. price sensitive. The most effective way for them to do this is to simplify their business, as for airlines, the complications equal the costs.
This simplification can happen in their fleet, with their passenger policies, with organizational redundancy and in their relationships with business partners. A reduction in business passenger volume, even if that reduced volume pays even higher fares as has happened this year, gives the airline the incentive to cut costs that are no longer needed or can no longer be subsidized.
A structural shift in business travel now seems certain, with companies having many reasons to travel less often. The implication of this for the largest US airlines is significant and will affect their business in several ways. The airline that realizes this and jumps on it will get a multi-year benefit.