Airlines Relying On New Passenger Types To Replace Business Travelers

The world of airline business travel has changed over the past few years. From comfort with video for some purposes, hybrid office arrangements, and more, businesses are choosing to travel less often to get their business done. A recent study estimated that the structural change in business travel could reduce volumes by as much as 40%. The recent emphasis on ESG metrics has also focused on airline business travel as a key way for some businesses to meet their targets. Some companies have announced a permanent reduction in business travel not because of Covid concerns, but because of cost and emissions savings.

The effect on the largest U.S. airlines could be significant. Losing even 10% of business volume means losing a greater percentage of revenue, since business travelers have paid higher fares than the more price-discretionary leisure travelers. This has major implications on the cost structure needed to get a positive return on capital, and forces airlines to rethink their fleet, seating configurations, loyalty programs, and more. Rather than do this hard work, though, some airlines are rationalizing that new passenger types are showing up just in time to replace these lost business travelers.

The Premium Leisure Passenger

Delta Airlines has formally stated that there is a structural change in travelers. As part of this, they noted that more leisure people are opting for premium seats, and so they have called this trend the “premium leisure” passenger. Has this passenger just emerged? Not likely. Early in the pandemic, private jet companies noted an uptick in leisure customers who could afford those products and saw them as a way to stay safer than commercial flights.

Importantly, there is no such thing as a singular business traveler. People who travel for their business also travel for leisure. They tend to build up loyalty points and experiences in nicer aircraft compartments and hotel rooms, so it’s not surprising that they don’t want to down-scale when they travel for leisure. This is not a new, post-Covid trend. They likely are seen more in the premium cabins today simply because they get upgraded more often with less competition. This type of passenger is not a replacement for lost business travelers, though they likely are a better replacement than the purely price-sensitive leisure traveler. If some of them are traveling less for business too, however, their ability or willingness to pay more for leisure travel may also be stressed. It’s hard to imagine that this is a large and growing group, and while it makes sense to address it, it doesn’t change the risk of losing a significant amount of business travelers.

The Bleisure Traveler

American Airlines has noted that as work changes, some trips that look like leisure trips are really remote work locations. A related trend they see is blending business and leisure trips more, thus the irritating-sounding ‘bleisure’ moniker. These may show up as a lower cost of sale, since they don’t come through the normal corporate contract channels. But like the premium leisure travelers above, these people aren’t really new. In fact, they became commonplace when smartphones arrived on the scene.

It is the rare person that truly disconnects when they go on vacation. Even if not immediately responding to texts and emails, most people take some time during their day or trip to connect back to home and office. The idea that more people are combining work and pleasure is possible given that more people are working remotely. But it isn’t obvious to me that this is a fast-growing segment of business travel in disguise.

The Small Business Traveler

This type of traveler is not new and does exist in large numbers. Often called SME, for small to medium enterprises, these travelers bridge the gap between corporate business travelers and price-sensitive leisure travelers. SME travel is more price sensitive because often the traveler is paying for the ticket themselves. They therefore better understand the value of the trip and are sometimes willing to take compromises in service or timing to save some money.

Southwest Airlines is the king of this traffic type with high frequency, reliable service, and reasonable fares. They make it easy for many SME travelers. As the pandemic reduced the corporate travelers, United Airlines eliminated change fees as a way to win some of this SME traffic. With plenty of corporates, it was ok to let Southwest carry the somewhat lower paying small business travelers. But with fewer corporate travelers, the SMEs looked better to United than the truly price-sensitive leisure traveler.

Addressing The Elephant In The Room

The deflection used by the large U.S. Airlines is perplexing, as it is clear to most that business travel has changed since the pandemic. The combination of good technology,, personal risk concerns, and ESG sensitivity means that most companies will be more cautious about approving business trips. Since the revenue impacts of this are critical for the largest U.S. airlines, but not the low-cost airlines, one might expect more aggressive responses than we’ve seen so far. Robert Isom, American’s new CEO, says that he still expects a full recovery of business travel but “the mix will change”. This oxymoron doesn’t match any data or statements from key businesses who say quite the opposite. Maybe by “changing mix” he is saying that these other passenger types will replace the lost business travelers, and thus a full recovery can be claimed in volume even though it won’t be matched by a full revenue recovery. To his credit, he also stated that American is working to build an airline that can be profitable without a full business recovery. That would mean serious cost-cutting.

Both American and Delta have made changes to their loyalty programs, suggesting that they recognize these programs need to change to be relevant for a broader mix of travelers. The longer-lead time items, like changing fleets or reconfiguring seats on aircraft, are still yet to come, and it may be too early to expect these kind of changes until we really see how much business travel returns over the next two years. The good news about “identifying” and labeling these new passenger types, even though they were there all along, is that it is a passive admission that the airlines can’t make up their business traveler loss with only low-price leisure travelers. That’s a huge concern for the biggest airlines, as their cost structure is burdened with all kinds of costs aimed at attracting what may be a shrinking pool of customers. Avianca, an airline that ran like a true legacy company for decades, decided in their bankruptcy to become a low-cost airline since they saw that’s the best way to compete going forward. Who will be the first of the four largest U.S. Airlines to blink, and thus gain a head start advantage on the others?