How Large U.S. Airlines Can Address The Change In Business Travel

Aerospace & Defense How Large U. S. Airlines Can Address The Change In Business Travel Ben Baldanza Contributor Opinions expressed by Forbes Contributors are their own.

I write about airlines and travel to explain this crazy industry. Following New! Follow this author to stay notified about their latest stories. Got it! Sep 7, 2022, 05:23pm EDT | New! Click on the conversation bubble to join the conversation Got it! Share to Facebook Share to Twitter Share to Linkedin The idea of the “road warrior” business traveler is changing, and large U.

S. airlines need to adjust . .

. [+] their businesses as leisure travel becomes a bigger percentage of total volumes. getty When the pandemic hit the world in early 2020, air travel was thrown for a loop as people stayed home and most travel ground to a halt.

Over the last two years, a number of predictions have been made about the return of business travel. Delta Airlines recently reported that their business-related revenue matched 2019 but on lower volume and higher prices. Daily, there are media stories about employees’ return to the office and how different companies have different views on what this means.

The effect on the largest U. S. airlines cannot be understated.

Prior to the pandemic, business travel for these airlines represented about 20% of their volume but over 50% of their revenue . With business travelers paying rates three to four times that of leisure passengers, the largest U. S.

airlines are facing a big challenge if the structural changes in this kind of travel are permanent. Here are five ways that the airlines may need to change to address this: Flight Schedule Since the pandemic first hit, airline schedules have focused more on leisure destinations since business travel was so uncertain. Now, with roughly 75% of 2019 domestic business volume back , large U.

S. airlines have to think about the right scheduling balance. It’s not that some routes are all business or all leisure, since every route carries some of each.

The proportion is different of course, and for routes with a lot of business travel it is often frequency that wins the traveler. That’s why Southwest Airlines carries so many small business travelers especially. For the three largest U.

S. airlines, frequency on any one route is not only about the business traveler mix, but also on the ability to make connections at a hub. When an American Airlines plane arrives at DFW airport from Denver, ideally it will be timed to meet many other flights giving customers the chance to connect to many locations.

But the United Airlines trip on the same route would need those connections to happen in Denver, since that is a United hub and DFW is just a spoke. As the volume of business travelers clarifies further, it is likely that some frequencies will need to be dropped. Doing this would make aircraft time available, which could be used to fly other routes, the airlines could just reduce overall asset utilization, or retire their least efficient planes.

What’s clear, though, is that a schedule built on demand patterns from pre-pandemic business travelers is not the schedule that will be optimized for the post-pandemic world. MORE FOR YOU American Airlines Pilots Say Operations Managers Must Go After Summer Breakdowns The U. S.

Air Force Is Gradually Rebuilding Its B-52 Bombers From The Rivets Out An American Bomber Visited Malaysia. A Bizarre Mix Of Local Jets Rose To Meet It. Seat Configuration First Class used to be the most luxury product that airlines offered.

But this product is quickly fading, as those willing to pay for this product have largely disappeared or moved to private aviation . The largest U. S.

airlines today use a three-class model, with standard coach, premium economy, and business class. Domestically, some still call this First Class but no one confuses this with how the domestic cabin compares to long distance international travel. The proportion of these, not unlike the schedule itself, is largely based on pre-pandemic volumes and demand.

Premium Economy is taking over as the replacement for business class , or domestic first class, too. It offers more legroom than standard coach but not much else in most cases. But for most domestic U.

S. trips, this perk is what most people value and the price point for the exclusive cabin of business class doesn’t make as much sense. Plus, many have been annoyed to pay for domestic first class and only then asked to pay $19 or more for slow wi-fi.

For most domestic trips, airlines will likely have to reduce the business/first cabin in favor of premium economy, and dense up the standard coach cabin even more. This means adding a row or two of more seats, and with a greater percentage of passengers coming from price-sensitive leisure travelers this makes sense. Changing cabin configurations is expensive and takes time, so airlines won’t make this change quickly or lightly.

But as post-pandemic demand comes clear and business travelers flatten out at 80% of 2019, some will take this plunge to better match their fleets to the new demand patterns. Sales Force Large airline sales forces tend to have two primary objectives: win travel spend from businesses, and win disproportionate share from travel agents. These teams work well when fighting for business in contestable cities, like ones that can be served by several different airline hubs.

Kansas City, for example could plausibly use Dallas, Atlanta, Chicago, or Minneapolis for connections where a nonstop is not available. By offering fare discounts and perhaps special treatment of employees (automatic elevation in the loyalty program, for example), a business in this type of city may choose to drive their traffic to one airline. A hub creates more challenges.

Delta Airlines runs a large hub in Atlanta. On the one hand, businesses in Atlanta really have no other choice of airline if they fly to multiple locations, since Delta offers the most nonstop flights to the most destinations. However, if a business has an operation in Atlanta and Houston, United may be a reasonable choice since they would fly nonstop on the route this business uses most.

An airline sales force that offers significant discounts in their own hub runs the risk of significant revenue dilution. Trying to encourage travel agents to steer traffic to airlines where the agent gets paid the most is a game that can work for short periods but is often matched by other airlines and ends up raising costs for no new revenue. An airline yield manager would tell you that it is common for a sales team to push the revenue management team to make fares available for their client that might not otherwise be offered.

But that same manager would tell you that they virtually never get a call asking them to raise a price because they can get their client to pay more. That is the problem with most airline sales forces – they are often rewarded for revenue that may not be in the airline’s interest to sell. Low-cost airlines often have small or no sales force, since they sell based on price and don’t focus on attracting business travelers.

As large airlines deal with the structural change in business travel, they will need to re-think the size and focus of their sales force. In doing so, they likely have the opportunity to spend less on both people and discounting since the amount of business traveler volume is reduced. However, with less total business travel overall, the fight for business travelers in contestable cities may accelerate.

Loyalty Programs Large airline loyalty program economics have been driven by the “road warrior,” or business traveler that flies multiple times in a month. With businesses traveling less, loyalty programs need to recalibrate and widen their net to become relevant for even the occasional traveler. The recent changes to give credit card spend more equal weight with flying spend is a move in this direction.

However, there is a longer-term risk here. Banks have been willing to pay airlines for points that the bank can issue for credit card spend. In doing so, they hope to get their card used more often since the user can win free travel or upgrades even when buying groceries and gas.

What banks are willing to pay may reduce over time, if they feel that the aspiration of free travel may lose some of its attractiveness. With leisure traffic not seeing the same structural change as business travel, it’s also possible that the banks find their affinity card becomes even more valuable. What’s clear, though, is that loyalty programs, like seat configurations and flight schedules, have been structured and priced based on pre-pandemic travel patterns.

With leisure travel or even “bliesure” travel (combined business and leisure trips) representing more of the total passenger volume, loyalty programs will need to adjust . Cost Control Under almost any scenario, large U. S.

airlines need to focus on overall cost control more than ever. This is because labor costs are becoming a higher percentage of total costs, and low-cost airlines are growing at a faster rate meaning price pressure will continue for the most price sensitive travelers. The way they can do this most effectively is to simplify their businesses , as with airlines, complications equals costs.

This simplification can happen in their fleet, with their passenger policies, with organizational redundancy, and in their relationships with business partners. A reduction in business passenger volume, even if that reduced volume pays even higher rates as has happened this year, gives the airline the motivation to reduce costs that are no longer needed or can no longer be subsidized. A structural change in business travel now seems certain, as businesses have many reasons to travel less often.

The implication of this for the largest U. S. airlines is significant, and will affect their business in multiple ways.

The airline that realizes this and jumps on it will gain a multi-year advantage. Follow me on LinkedIn . Check out my website .

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