Airlines are struggling to gain traction on the return of business travel. As companies push back … [+]
Summer 2021 proved to be good for U.S. airlines in terms of volume, though incentive pricing meant that revenue wasn’t quite as robust. In the fall, traditionally families don’t travel much and businesses hit the road again. While business volumes are smaller than leisure, the higher fares paid by business travelers normally makes fall a profitable season for the largest U.S. airlines that carry most corporate road warriors.
Fall 2021 does not look so bright, however, consistent with the apprehensions about rebounding pandemic risks and continually changing government policies related to travel and grouping in general. As a result, this fall is likely to be another money-losing season for the largest U.S. airlines as they are offering a lot of seats for sale to passengers who just aren’t that likely to show up.
Pre-pandemic, the summer family vacation season would end in mid to late August and was replaced with a fairly robust business bump. With kids back in school, companies would send people out to generate new business, inspect facilities, meet with clients, and more. Also, fall is time for many trade shows and conventions and this would generate almost 20% of all business travel. Big convention cities like Orlando, Las Vegas, Chicago and more would benefit from these events, as the hotels and local restaurants could attest. When summer 2021 showed such leisure strength, and vaccine roll-outs had businesses estimating returns to office for most employees in September, there was reason to be optimistic that this traditional fall business bump could happen.
Instead of a business bump, businesses are retrenching in terms of air travel. The fast infection rates by the Delta variant have caused companies to push back return to office plans, and when the New York Auto Show went virtual this sent shock waves through the convention industry. Further, Bloomberg published survey results showing the largest companies in the U.S. are expecting to cut back on business travel indefinitely. This fall, with few leisure customers and businesses cutting back, it could mean that airlines are in a situation with too many seats chasing too few customers. Book a flight for a mid-week trip between any two big cities, and you likely will surprised at the low fares you will find. Airlines will gasp until Thanksgiving to see if the boom in summer leisure travel continues with families wanting to be together for that holiday.
Longer-haul, international travel is more complicated and continues to be subject to ever-changing government rules. Some countries let you in if you’re vaccinated, some don’t; some require a quarantine, some don’t. British Airways, whose primary business is carrying people long distances to and from London, is starting a low-cost airline at London’s Gatwick airport because they don’t know what else to do with all of their airplanes. The largest U.S. airlines are using wide-body equipment that normally flies across an ocean to fly to places like Las Vegas, Miami, and Hawaii. The fall holds no hope for the return of long-haul international travel, and with pressure on the domestic revenues as well this means a bleak third quarter. Airlines have said as much, with several airline and multiple industry analysts warning of weak results for the back half of the year.
The low-cost airline industry continues to be aggressive and remains the best positioned among U.S. airlines for multiple reasons. These airlines live all year on leisure traffic, as they typically don’t offer the schedule or service to attract higher-paying business customers. When businesses don’t travel, America, Delta, Southwest, and United feel it but airlines like Alaska, JetBlue, and Spirit don’t. The newest U.S. airlines, Avelo and Breeze, aren’t betting on business travel either. The low cost of production for these airlines allows them to be profitable at lower average fares, meaning that they can make money on the travel that largest U.S. airlines use only for fill. Around the world, this is proving true as the airlines with the traditionally largest business travel revenue seem the most fragile.
In June, airlines and those who track the financial health of the industry were bullish about 2022. With strong leisure demand showing and businesses all talking about getting back to normal, there was reason to be optimistic. The last few months have started to show that a new reality is setting in, one that suggests that business traffic will never be the same and some aspects of business travel will never return. This has significant implications for the U.S. airlines, especially the largest ones. This is spurring new discussion of alternative seating to make more, denser cabins feel more comfortable, and putting more emphasis on where people are likely to travel for leisure rather than for business. High-frequency among large cities many be reduced somewhat in favor of larger average aircraft flying less often. Importantly, 2022 is uncertain in term of industry profitability as carriers work through these structural issues. Rather than emerging in 2022, the U.S. airline industry is likely to continue to muddle through until the country and the world better understand the risks and realities of living with this virus.
I am the former CEO of Spirit Airlines, where my strong team transformed the company into the highest margin airline in North America and created a new model for air
I am the former CEO of Spirit Airlines, where my strong team transformed the company into the highest margin airline in North America and created a new model for air travel in the US. I now serve on several public and private company boards, am an Adjunct Professor of Economics at George Mason University, and co-host the popular weekly podcast Airlines Confidential.