Airlines fear death of their cash cow
Business travel under threat from pandemic fear and new technology
United States airlines hammered by the Covid-19 pandemic are confronting a once-unthinkable scenario: that this crisis will obliterate much of the corporate flying they’ve relied on for decades to prop up profits.
“It is likely that business travel will never return to pre-Covid levels,” says Adam Pilarski, senior vice-president at Avitas, an aviation consultant. “It is one of those unfortunate cases where the industry will be permanently impaired and what we lost now is gone, never to come back.”
At stake is the most lucrative part of the airline industry, driven by businesses that accepted — however grudgingly — the need to plop down a few thousand dollars for a lastminute ticket. Business travel makes up 60 to 70 per cent of industry sales, according to estimates by the trade group Airlines for America.
That is under threat following an unprecedented collapse in passengers that started four months ago. Half the respondents in a survey of Fortune 500 chief executives said trips at their companies would never return to what they were before Covid19, according to Fortune magazine.
Even industry leaders such as Delta Air Lines chief executive Ed Bastian are bowing to the inevitable.
“I don’t think we’ll ever get back entirely to where we were in 2019 on the volume of business traffic,” Bastian said on July 14 after the company reported an adjusted quarterly loss of US$2.8 billion ($4.26b).
Even after 18 to 24 months, business travel will remain at least 25 per cent below prepandemic levels and may stay down by as much as half, says Bruno Despujol, a partner at consultant Oliver Wyman.
Premium US domestic demand collapsed in April with the rest of the market, and those fares plunged in May. This week, a lastminute ticket for American’s luxury first-class service between New York and Los Angeles listed for US$3322, compared with US$8000 when those flights began in 2014.
Warren Buffett sold his stakes in American, Delta, Southwest and United this year as the novel coronavirus caused a collapse in flying. “The world changed for airlines,” Buffett told Berkshire Hathaway investors in May.
The airline industry is well-versed in failure, and predictions of business travel’s demise proved premature after the September 11 attacks and again after the Great Recession of 2008-09. Consolidation and airline job cuts helped drive those comebacks, and some carriers predict the eventual return of their cash-cow customers.
“We believe business travel will come back and come back strong as ever,” says Andrew Nocella, United’s chief commercial officer. “But it will take about six to 12 months to work through the system once a vaccine or treatment becomes widely available.”
What’s different now isn’t just the depth of airlines’ problems, however. It’s also the opportunities for technological workarounds at companies that once shelled out for first-class seats.
United States passenger counts plummeted more than 95 per cent at their worst, with virus-fearing travellers of all types shunning the tight quarters that airlines relied on to maximise revenue from each flight. Even with some leisure travel perking up, the numbers aren’t enough, and Wall Street is offering a clear verdict: the six largest US airlines ended last week with a combined market value that’s less than the US$70 billion of Zoom Video Communications, whose software has made “Zoom calls” a byword in households as well as boardrooms.
Improved video conferences further lower the chances of returning to the heyday of corporate flying as companies look at travel budgets as ripe for cuts, says Eric Bernardini, a managing director at consultant AlixPartners.
“It won’t replace the need to go visit your customer, but there will be an impact on how many people are going to travel and how often,” he says.
For now, big US carriers are aiming their schedules at leisure destinations and domestic trips. Meanwhile, companies are grappling with a changing web of government travel restrictions at home and abroad because of the pandemic.
Columbia Sportswear, for example, is revising its policies, evaluating the safety protocols of hotels, rental-car companies and ride-share providers. Health risks are joined by concerns an employee could get stuck in quarantine when travelling to other countries and returning to the US.
“Face-to-face contact and visibility is important. That said, no one’s going anywhere,” says Peter Bragdon, Columbia’s chief administrative officer. “It’s pretty easy to imagine how something that was meant to be a few days of travel turns into five weeks of being caught in a snarl.”