How The Last Three Years Has Structurally Changed Airline Travel

Sometimes change comes slowly, and sometimes it arrives more quickly. The way that people travel by air has been relatively constant over the past few decades, largely based on who is paying for the ticket. When a company is paying, schedule convenience, frequent flier benefit, seating or upgrade ability, and other “soft” items tend to take priority over the price point. When the customer pays for the ticket, the intermediate-good nature of air travel takes control and price paid becomes the overwhelming first choice of consideration.

Over the last three years, several major shifts have occurred that change the way people think of air travel. Obvious among these is the pandemic, that in part made most people more confident of video conferencing as a way to do business. The pandemic also changed people’s view of personal risk. Beyond the pandemic, investors have been pressuring businesses to report on ESG targets, and reducing air travel has been targeted by many companies as an easy way to reduce their environmental footprint. Here are five ways that travel has changed in just the last three years:

Businesses Have Reimagined Travel Budgets

Many businesses require travel as part of their activities. This includes sales efforts to support existing customers and to win new business. It also includes training and maintenance efforts to keep plants running, meet ongoing recurrent training needs, and to standardize IT infrastructure across a wide geography. Also part of this are promotions and networking opportunities offered by trade shows and conventions. The “T&E” (travel and entertainment) line of many companies is significant, and over the last three years there has been a renewed interest in reducing this expense.

This is considered a real win at many companies. While some minority of business travelers wear the “road warrior” label with pride, most are happy to travel less often and better balance their work and family life. While most employees are happy traveling less, CFOs are happy to reduce this expense line and those tracking the ESG initiatives for a company get to take credit for this reduction. No one loses except the airlines, hotels, and restaurants that miss out on the business travel. The pandemic helped this shift by requiring businesses to use video as a replacement for some time, and this taught them the opportunities where this would work as well as the airline travel. Of course, a lot of travel is still required, but even a small reduction in airline business travel has an outsized impact on airline revenue.

More Trips Are Blended, Maybe

Business travelers have often blended some leisure with their business trips. A show in New York, a round of golf, or staying on a extra day or two to enjoy the location. Yet this idea of blended travel, sometimes abrasively called bleisure travel, is possibly increasing but certainly is now better identified by the airlines. American Airlines, for example, has started to introduce products specifically catering to the blended traveler.

There are two levels of this kind of travel, at least. One would be the traveler, or travelers, adding leisure components to an otherwise business trip. More involved is bringing friends or family along for at least some part of the trip, which may require extra trips or hotel rooms. Both add legal concern about who is responsible when something goes wrong. Whether this activity has really increased or not, a spotlight has been focused on this activity so more companies are thinking about its implications. This focus may, in turn, actually increase the activity or put the right boundaries around it.

Leisure Travel Will Represent A Larger Share

Leisure travel has traditionally been the volume play for airlines. Some airlines have even made the case that low-paying customers actually subsidize the higher-paying business travelers. The argument for this is that flight frequency, something valued by business travelers for flexibility, is only possible when leisure travelers are motivated by price and thus can be price-motivated to fill all the seats not purchased by business travelers.

With even a small reduction in business travel, the industry will have even more seats to fill unless the big four airlines all shrink. This also suggests a reduction in the average fare for the largest airlines, unless they successfully raise the rate enough on the business customers still flying. Price elasticity exists at all price levels, though some travel is less elastic than others of course. The point is that charging more to the remaining business customers isn’t without some risk.

More leisure travel as percentage of all airline traffic has other implications for airlines that carry business travel. These include fleet, seating configuration, loyalty program, and the overall cost structure. With pressure on labor rates, this becomes very challenging for most airlines and is the largest threat facing most of these companies.

Short-Distance Airline Trips Are Waning

The regional airlines in the U.S. fly most of the short-distance routes, in partnership with the large majors. This segment of the industry is slowly shrinking, largely due to the huge pressure on pilot rates making the costs of buying their service more challenging. Some of the short-distance travel will just go away, and other trips will be replaced by innovative companies using buses like Landline, and eventually maybe by short distance electric air vehicles.

As the feed to large airline hubs reduces with fewer regional trips, this has implications for the gauge and frequency of the big airline hub flights. If every trip can be replaced by a more efficient vehicle, this risk could be mitigated. More likely, airlines and airports will need to be more creative for short-distance flights. For airports, this could mean finding resources for bus feed or electric vehicle feed, or even the parking and ride share infrastructure.

Peak Seasons Are Getting Peakier

Consistent with both blended travel and more leisure share, peak seasons are becoming more important for the airlines. This Thanksgiving, the airlines carried almost 100% of the passengers carried in 2019, but times like late August and September, which traditionally lived mostly on business travel, are becoming smaller when compared to the peaks.

Like the “don’t build the church for Easter Sunday” warning, adding enough capacity for bigger peaks is very risky unless it can all come from utilization (using the existing fleet more hours each day.) The logical implication of this is that the peaks will become more expensive for consumers, and this could create spreading the travel over more days. Changing work from home realities supports this idea, too.

Changing travel patterns creates both risks and opportunities for airlines. The one way for the big airlines to lose from this is to ignore that it is happening, Like American’s new blended products, providing service to a growing travel base, even if most of that growth is highly price sensitive, is the key to making lemonade out what looks today like lemons.