Premium Leisure Won’t Replace All Lost Corporate Business Travelers

As post-pandemic air travel demand started to reveal, airline CEOs discussed new kinds of travelers when faced with an almost certain loss of some corporate business flyers. One popular “new category” is blended travelers, who do business while on a leisure trip. The other is the “premium leisure” traveler. This is someone one who willing pays a higher price for a better experience. Delta Airlines has been particularly aggressive on this kind of traveler, and has spoken of it as being preferred to corporate travelers in both yield (price paid per mile) and load factor.

This might lead one to assume that the industry faces no risk from a loss in corporate travelers. The premium leisure passenger will step in to fill the void. This is not likely, as premium leisure has characteristics that make it not as dependable as corporate travel. Further, someone may be a premium leisure buyer when the booking their hotel or their experiences while on vacation, but still look for a low fare when getting there.

Corporate vs.Premium Leisure

The table below outlines some key characteristics about premium leisure travelers when compared with the corporate business customer:

This table shows why the premium leisure passenger, while certainly valuable for the airlines, isn’t a 1-1 replacement for a lost business customer. Revenues from a corporate contract are often fixed in absolute or by algorithm, while nothing would stop a premium leisure flyer to take advantage of a sale or special promotional price. Some corporate flyers used to be considered “road warriors” and would fly twice a month or more. Premium leisure travelers take longer trips, but fly less often. Again, in a single quarter this could look like a fair substitution but over time the corporate volume of trips won’t matched by the leisure flyers. The hospitality space may benefit more than the airlines from this “new” traveler.

Most importantly, corporate travelers are flying on the company’s dime. Decades of behavior show that when the company is paying, things like flight time, upgrade ability, and other non-price issues matter more than the ticket price. But when people pay for tickets themselves, even the premium flyers will look to save money. They will pay to sit in a nicer seat, but may be willing to move their trip somewhat to get that nicer seat for a better rate.

Airlines will need more than one premium leisure customer to replace a single lost corporate flyer. Looked at as revenue over a full year, it’s likely that rate will be about 2.5 to 1.

Elasticity When Customer Pays

Airline price elasticity is notoriously high and well documented. There is a myth that only leisure demand is price sensitive. I have a friend who worked for a private jet service supplier, and he noted that demand was significantly higher at $3,500 per hour than $4,500 per hour. What really drives price elasticity for airlines depends on who is buying the ticket. At any price, if someone is paying from their own pocket, they care a lot about the price.

This is compounded for airlines because of their intermediate good nature. No one really wants to be on the plane — they want to be where they are going. So, even though they be willing to pay up for a hotel or a great destination experience, this doesn’t mean they automatically will pay more to get there. Airlines have an additional issue with premium leisure passengers. If they have built up loyalty point balances that couldn’t be used much in the last few years, they may choose to burn off points for their next few trips rather than pay cash.

None of these issues are as big for the corporate traveler. The company is paying, and the traveler is building their point balance rather than redeeming it. Premium leisure still behaves like leisure, so airlines cannot count on continued equally strong yields (price paid per mile) from this group, on an annual basis.

Implications For Airline Revenue Management

Clearly premium leisure passengers are a better replacement for lost corporate business than the most sensitive price travelers that make up most of the demand of the low-cost carriers. But needing two or more, on an annual basis, to make up the revenue of one corporate loss has implications for forecasting, sales, loyalty programs, and more.

Price dispersion is the term airlines use to value the difference from the lowest to the highest price offered on a flight. For the big U.S. airlines, the value of the highest fares could be four to 10 times higher than the lowest fare. This biases the revenue management system to be sure to leave seats for the highest paying demand, because selling even one cheap seat that ends up blocking a high price sale is a big revenue error. When the price demand dispersion shrinks, which will happen with fewer corporate travelers, the cost of that error shrinks. Let’s look at a simple example. Say an airline like United has a $59 fare on a route, matching a Frontier price. But they also carry corporate business that Frontier doesn’t, and this sells at $375 on the same route. Their systems will stop selling the $59 fare in time to ensure that every $375 customer can be accommodated, or else they are losing $375-$59, or $316 on every cheap seat they sell that blocks a high fare.With less demand for the $375 fare, more $59 fares will likely be sold. If United can get premium leisure customers to pay $199 for a premium economy seat, it’s better than stealing from Frontier but doesn’t fully replace a $375 customer. Yield management forecasts and processes will have to adapt to these demand changes.

Sales teams will also be needed less often, and American Airlines has already recognized this and made big cuts in this area. Loyalty programs have been evolving since the pandemic first hit, initially locking people into categories based on pre-pandemic spend. With fewer road warriors and more leisure customers, premium or not, what it means to be loyal is also changing. Credit card spend is now considered equal with ticket purchases, since the airline gets paid for the miles the bank gives out but needs no airplanes, fuel, or pilots to produce this revenue.

There is an emerging consensus that the volume of corporate travelers is stuck at about 20% less than before the pandemic. This is logical and there is no reason to think it will snap back. So the search for travelers that can replace this lost revenue makes sense, but it is too quick to say anything will be a 1:1 replacement. More likely, airlines will continue to evolve their organization, processes, and policies as air travel demand is better understood.