Airlines' Business Travel Problem

- US domestic air travel recovered to approximately 80% of pre-pandemic levels by July 2021. TSA checkpoints recorded 79,332,046 passengers in July 2019 compared with 63,118,017 in July 2021. This exceeded most expert forecasts made in 2020, despite international travel and tourism remaining severely depressed.

- The world's three largest aviation markets experienced surprisingly strong recoveries. US air travel reached approximately 80% of its 2019 level, European air traffic recovered to around 70%, and China's scheduled airline seats had already surpassed 2019 capacity. All three markets performed better than even the most optimistic expectations.

- Airline revenue recovered much more slowly than passenger demand. United Airlines generated $11.402 billion in operating revenue in Q2 2019 but only $5.471 billion in Q2 2021, approximately 48% of its previous revenue. American Airlines recovered to 62.5% of its Q2 2019 revenue, while Delta reached 56.8%, despite overall US passenger demand recovering to approximately 67%.

- Airlines were earning substantially less revenue per available seat mile (ASM). United's revenue per ASM fell from 14.32 cents in Q2 2019 to 11.02 cents in Q2 2021, representing 76.95% of its previous level. American recovered to 78.84%, while Delta reached just 69.45%. Because airlines control how many seat miles they offer, these figures reveal a problem beyond simply having fewer passengers.

- The recovery was heavily concentrated in leisure travel rather than business travel. Summer 2021 saw enormous demand for American holiday destinations, with Hawaii hotels charging Four Seasons-level prices, rental cars in Alaska becoming extremely difficult to obtain, and Uber rides in Las Vegas becoming unusually scarce. Tourism infrastructure was operating near peak capacity even as corporate travel remained depressed.

- Major American business districts remained largely deserted. Midtown Manhattan, Washington DC's K Street, and Chicago's Loop had not experienced a meaningful return of office workers. Major employers including Google, Microsoft, Apple, Facebook, Deloitte, Cisco, and McKinsey had not substantially resumed office operations.

- The absence of major corporations from their offices directly affected corporate travel. Business travelers frequently visit other companies for meetings and commercial purposes. When offices remain closed, there are fewer companies available to visit. The absent employers also included some of America's largest corporate travel spenders, helping explain why business travel had not recovered.

- The traditional international network airlines were particularly exposed to the loss of business travelers. United, American, Delta, British Airways, Air France, Cathay Pacific, Singapore Airlines, and Qantas operate full-service network models designed substantially around corporate customers. Their services, schedules, route networks, premium cabins, frequent-flyer programs, and airport facilities reflect the needs of business travelers.

- Leisure airlines and business-oriented airlines optimize their schedules for different priorities. Leisure travelers generally prefer convenient nonstop flights and can organize holidays around limited departure schedules. Business travelers place greater importance on being able to travel at a particular time and reach their destination in time for meetings.

- The Phoenix–Bozeman route illustrates the difference between leisure and business airline scheduling. Southwest operated a seasonal nonstop flight on Saturday and Sunday mornings, suitable for someone visiting Yellowstone National Park. United offered connecting itineraries through Denver or Los Angeles, with daily departure options at 6:10, 9:40, 11:48, 1:55, and 3:41 pm. Its more frequent connections provided greater scheduling flexibility despite requiring a stop.

- A Phoenix–Memphis business trip demonstrates why corporate travelers prefer network airlines. A sales representative attending a Tuesday meeting from 2 pm to 6 pm could take Southwest's nonstop flight on Monday at 12:25 pm, arriving at 5:20 pm, then wait approximately 21 hours before the meeting and another 23 hours for Wednesday's 4 pm return flight. United offered a Tuesday 6 am departure through Denver, arriving at 1 pm, followed by a Wednesday 7 am return through Houston, getting the employee back to the office by noon.

- Business travelers value departure times and schedule flexibility more than nonstop convenience. The Memphis example shows why a connecting flight can be considerably more attractive than a nonstop flight when it allows someone to attend a meeting and return to work without wasting two additional days.

- Hub-and-spoke networks help full-service airlines provide more departure options. United, Delta, and American consolidate passengers through major hubs, allowing them to operate frequent flights to fewer destinations rather than offering nonstop services everywhere. This creates more possible itineraries and departure times for business customers.

- Full-service airlines historically benefited from the reliability and profitability of corporate travel. Business travelers travel throughout the year rather than concentrating their trips around holidays and good weather. They are also relatively price-insensitive because companies need employees to attend meetings, visit clients, and generate revenue regardless of ticket prices.

- Business travelers account for a disproportionately large share of airline revenue. Although only approximately 20% of US domestic trips are business-related, these travelers generate substantially more than 20% of airline revenue. Their willingness to pay higher fares makes them especially valuable customers.

- Airlines use advance booking patterns to practise price discrimination. Leisure travelers generally book months ahead, making them more sensitive to ticket prices. Business travelers often book only days or weeks before departure, when they have less flexibility and are more willing to pay higher fares. Airlines exploit this difference by initially selling cheaper tickets and increasing prices as departure approaches.

- United's disclosed operating economics illustrate how inexpensive advance tickets can be. Its average flight length was approximately 1,460 miles (2,350 kilometres), with an average operating cost of $199.58 per passenger. Two months before departure, eight of twelve examined flights were selling tickets below that per-passenger operating cost, and the average fare across all twelve flights was also below operating cost.

- Ancillary revenue helps compensate for inexpensive advance tickets. Extra-legroom seats, checked baggage, Wi-Fi, food, and beverages can increase the amount earned from passengers. Nevertheless, the initial ticket prices alone were unlikely to generate significant profits for United.

- United's average fares more than doubled as departure approached. Across the twelve examined flights, the average fare increased from below the $199.58 operating cost two months before departure to $413.83 on the day before departure. These expensive last-minute tickets were typically purchased by business travelers.

- A hypothetical United flight demonstrates the economics of combining cheap leisure fares with expensive business fares. Using an all-economy Boeing 737-900 with 179 seats and an assumed 150 occupied seats, based on United's company-wide load factor, operating costs would total $29,937. At the stated average revenue of $36,245, the flight would generate an operating profit of $6,308.

- The airline's profitability depends disproportionately on its highest-paying passengers. In the hypothetical flight, approximately 120 cheaper tickets at $199.58 and 30 expensive tickets at $413.83 would produce roughly the stated average flight revenue. Business travelers represent 20% of the 150 passengers, but the final 15 passengers, half of that business segment, effectively account for the entire operating profit in the illustration.

- The traditional network-airline business model becomes much harder to sustain when corporate passengers disappear. Airlines can fill many seats with inexpensive leisure travelers, but those passengers do not necessarily generate enough revenue to cover the higher costs of a full-service operation. Losing the customers who normally pay last-minute premium fares removes a critical source of profitability.

- Southwest's lower operating costs give it an advantage over full-service competitors. In Q2 2021, Southwest averaged 10.22 cents in operating costs per ASM, compared with United's 14.49 cents. Southwest's low-cost structure allows it to operate more economically without depending as heavily on expensive corporate passengers.

- Southwest's revenue recovery closely matched its passenger-demand recovery. While United, American, and Delta experienced revenue recoveries substantially below overall demand recovery, Southwest reached 67.83% of its 2019 revenue level against a 67% demand recovery. This illustrates how a leisure-oriented, lower-cost airline was better positioned for the particular recovery taking place.

- The end of summer threatened to expose the weakness in airline demand. Summer 2021 had been one of the busiest seasons on record for many American and European tourist destinations. However, leisure travel normally declines after summer, while corporate travel begins increasing in early September and remains above average through the end of the year.

- Business travel normally stabilizes airline demand during the quieter autumn and winter months. In a typical year, corporate passengers compensate for the decline in leisure travelers after summer holidays. In 2021, this seasonal support was unlikely to return in its usual strength, creating an unusually difficult transition for airlines.

- American travel demand was already declining faster than in 2019. US demand fell 2.8% between the weeks of July 25 and August 1, 2021, followed by another 3% decline in the week of August 8. These initial reductions suggested that the post-summer retreat was beginning earlier and more sharply.

- The early-August passenger decline was approximately 30% faster than in 2019. In 2019, the first 18 days of August had 4.2% fewer travelers than the final 18 days of July. In 2021, the corresponding difference was 5.5%. Although the absolute difference was relatively small, it indicated a faster seasonal contraction.

- The decline was expected to accelerate because neither major source of airline demand could fully compensate for the other. Leisure travel was retreating after summer, while business travel was not returning to its normal September-to-December levels. The next major American leisure travel period was Thanksgiving in November, while Europe would experience its next major seasonal increase around Christmas.

- The Delta variant threatened to delay the return of corporate travel. Businesses could postpone office reopenings and corporate trips because the pandemic's recovery was proving unpredictable. Even in countries with widespread vaccination, uncertainty about future developments was discouraging major corporate decisions.

- Consumer confidence suffered an unusually severe decline during July and August 2021. The University of Michigan's consumer sentiment index fell to 70.2, representing one of its largest historical monthly declines. This was its lowest level during the pandemic and its lowest reading since the Great Recession.

- The decline in consumer confidence reflected uncertainty about the Delta variant rather than simply the prevailing health statistics. In the US, Europe, the UK, and other highly vaccinated regions, hospitalizations and deaths remained substantially below earlier pandemic levels, even as public confidence deteriorated. Uncertainty about what would happen next was nevertheless affecting economic behavior.

- Corporate travel depended on confidence in the future direction of the pandemic. Businesses were unlikely to make major commitments involving office reopenings and employee travel without greater certainty about whether conditions would improve or deteriorate.

- Summer 2021 may have represented the first profitable period of the pandemic for American and European airlines. However, the end of the leisure travel season meant that continued improvement was increasingly unlikely without a meaningful return of business passengers.

- The long-term future of corporate travel remained uncertain. Most experts considered predictions that Zoom would permanently eliminate business travel to be exaggerated. Nevertheless, there was a realistic possibility that 2019 represented the historical peak of corporate aviation demand.

- Digital business practices and environmental concerns could permanently reduce some corporate flying. Companies increasingly have alternatives to travelling for meetings, while the environmental cost of flying to another city for a business lunch is becoming harder to justify. Together, these changes could reduce the structural demand for business travel.

- Traditional full-service airlines might eventually resemble leisure-oriented carriers more closely. If corporate travel never returns to its previous levels, United and Lufthansa could undergo gradual changes toward the business models of Southwest and EasyJet, with less dependence on premium corporate passengers.

- The pandemic demonstrated the importance of airline flexibility and adaptability. Airlines that built their operations around one dominant customer segment were particularly vulnerable when that segment disappeared. The crisis exposed the risks of relying too heavily on established travel patterns.

- The coming months were presented as a make-or-break period for airlines. It was understandable that airlines struggled to turn profits during the depths of the pandemic. However, as developed economies began recovering, the opportunity to restore profitability was emerging just as airlines' cash reserves had diminished and investor goodwill had been exhausted.

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