Mega-Trend 3: The decline of business travel changes yield profiles
There is a further force emphasising the role of narrowbodies, albeit slightly more obliquely. Higher yielding business travel (not just business class travel, but including economy class road warriors) will be slow to recover. That much is undisputed; the quantum and recovery period are less clear, but it will be sufficient to make the full service long haul model financially unviable. That has far-reaching implications.
For corporate travel accounts, the reduction will be provoked by cost savings, new connectivity alternatives and the impetus for decarbonisation.
First of all, chief financial officers have discovered how much cost can be saved by cutting out “unnecessary” travel. Amazon saved USD1 billion on travel in 2020. Travel expenditure will not bounce back to previous heights, notably where online meetings have become adequate substitutes.
Listed companies’ travel budgets will also be subjected to increased ESG scrutiny by investors, placing firms under great pressure to demonstrate reductions in their carbon footprint. Long haul flying accounts for 40% of all airline emissions, so that becomes a particularly soft target for any company wishing to display its decarbonisation credentials.
Travel will still be essential for global businesses, but journeys will be less frequent, with smaller groups of flyers from a company e.g. where four people used to attend an exhibition, only two or three might go.
Reduced business travel is of more than statistical interest for network airlines, where it can account for a third or more of total revenue. Even a fall of only 10% on previous levels can seriously undermine operating economics. Business flyers heavily cross-subsidise the cheap economy fares which help fill up the large widebodies. Without them the economics just don’t stack up.
The contraction in business travel, depending on the market, is much more likely to exceed 30%. Even in the US domestic market, where 2021 recovery has been rapid, business travel is still down more than 50%. Business travel growth had already been slowing relative to the overall market before 2019. It will recover from the immediate low levels over time, but its return will probably take several years; during that time, its absence will wreak enormous financial and often irreversible structural changes.
So, connecting those dots, there are some important outcomes. Faced by greatly reduced business travel patronage, as noted above, the dynamics of long haul operations will be severely put to the test.
First, stripped of a viable business component, long haul widebody frequencies and city pair directs cannot avoid being reduced. That will mean greater reliance on (more fuel efficient) single aisle aircraft, with much greater emphasis on intra-regional travel.
Secondly, because the full service network airlines rely most heavily on their long haul margins (where LCC competition is absent), their model will be further undermined. This equation applies most pungently to the European network operators, whose short haul connecting services have already already been cannibalised by the region’s LCCs. Notably, the Gulf carriers and some Asian carriers which rely on long haul-to-long haul hubbing may be less disadvantaged.
Thirdly, the smaller capacity of the new narrowbodies allows increased numbers of city pairs to be serviced, good news for smaller regional airports and cities. And, in turn, this growth profile should ease pressure on congested hubs.
Moderator: Spotnana, VP Strategy & Partnerships, Johnny Thorsen
- Bernstein Research, Equity Research Analyst, Alex Irving
- Ernst & Young, Global Head Travel Meetings & Events, Karen Hutchings
- Southwest Airlines, Vice President Southwest Business, David Harvey
- Virgin Atlantic, CCO, Juha Jarvinen
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