Three ways airlines might respond to the loss of business passengers

COVID | Jun 09, 2021 | By Satair | 4 min read

Airline profits are highly reliant on a small group of high-yielding business travellers. What will they do now that the demand for corporate travel has been severely depressed by the pandemic? 

For an industry whose profit motive is highly dependent on selling premium tickets, the steep drop in business travel brought on by the coronavirus pandemic is cause for deep concern. 

Globally, corporate travel is a trillion-dollar industry. In the United States alone, companies typically spend well over $60 billion per year on business airfare. These corporate trips are vital to the profit model of commercial carriers. 

Business-class tickets can cost upwards of ten times the price of regular economy seats. While business travellers make up just 12 percent of all airline passengers, they can account for as much as 75 percent of an airline’s profits. To take the example of a Boeing 777 flying from London to Washington DC, 48 business class passengers make the airline $322,704 while the 122 economy passengers bring in just $106,872.

Is this the end of business travel?

Airlines are thus highly reliant on passengers in their business, first-class and premium economy cabins. With fewer of these high-yielding customers flying because of the pandemic, airlines are being forced to consider dramatic changes to the way they operate. Three possible reactions have emerged as the aviation industry’s most likely response to the loss of business passengers. 

1. “Follow the flow of people”

Initially, airlines are likely to shift their focus to attracting leisure travellers eager to visit family and friends. 

“The pent-up demand for leisure opens up avenues for airlines to deploy aircraft to newer routes,” Siiri Palisaar, senior director for sales steering at the corporate-focused travel agency Lufthansa City Center (LCC), told the Knowledge Hub.

This is already beginning to happen in the United States, where passengers repeatedly set pandemic-era single-day traffic records throughout the month of May. Travel restrictions are also being lifted in Europe, leading airlines to focus on popular holiday destinations. 

“European carriers will pivot to leisure travel,” Adrian Yanoshik, an equity analyst at the Hamburg-based investment bank Berenberg, told CNBC. “This is a tactical response. You follow the flow of people.”

Scandinavian Airlines CEO Rickard Gustafson said his airline and others need to be ready to adapt to changes in the market. 

“I think we will see somewhat less corporate travel and more leisure travel,” he told CNBC. “We need to adapt our operation more towards seasonality to a larger extent than we do today.”

2. A recalculation of pricing and routes

Beyond a short-term focus on prioritizing leisure destinations, airlines may also need to reconsider the overall economics of both their pricing structures and their hub-based routing models. 

In an April report from McKinsey on the post-COVID future of the aviation industry, the consultancy firm said airlines should develop a new pricing logic to make up for the loss of business travel. In particular, it encouraged airlines to narrow the gap between the pricier nonstop flights preferred by business travellers and the cheaper indirect routes often booked by more price-sensitive leisure travellers. 

The report also questioned whether it still makes economic sense in an era of depressed demand for business travel to operate smaller aircraft between major hubs and smaller cities. 

“With business demand subdued, economics favour larger aircraft flying less frequently,” it stated. 

Business-class ticket prices could also be dropped in a bid to entice more leisure travellers. That approach was backed by Emirates Airline president Tim Clark, who suggested that 15-20 percent price decreases would help airlines fill their premium cabins.

“The corporate segment might diminish over time […] but the same seats will be filled by people who have hitherto not been able to afford that seat,” Clark said at the World Aviation Festival in April.

Graph showing locations of different classes of travel within aircraft

3. Cabin reconfigurations 

Another possible response is reconfiguring aircraft cabins to minimize, or even completely remove, business class seating until demand returns. 

“At the simplest level, lower business-class demand may warrant smaller business-class cabins,” the McKinsey report stated. “Taking this further, products may shift to better cater to premium-leisure passengers, such as growth of premium-economy cabins or development of business-class seats more suitable for travelling as couples or groups.”

Minimizing business seating would allow airlines to capitalize on the expected boom in VFR (visiting friends and relatives) travel by catering to premium leisure passengers. Airlines including British Airways have already opted to make more seats available in premium economy at the expense of business class. 

Many airlines may be hesitant to move forward on physical cabin reconfigurations with so much uncertainty surrounding business travel’s potential rebound, however.

“Airlines are very adept at adjusting to market demands,” LCC’s Palisaar said. “There are other ways like reducing capacity on routes, deploying aircraft with better-suited configurations that will be considered in the interim period before expensive re-fitting of cabin classes can be considered.” 

The Satair Takeaway

COVID-19’s impact on the aviation industry is far from over, and nowhere is that felt more than within the highly profitable business travel sector. An initial pivot to prioritizing the leisure passengers eager to travel again is a wise move that will help soften the blow of business travel’s decline. Decreasing the cost of business class tickets may also help lure corporate travellers back and entice leisure passengers to consider springing for a pricier ticket. But neither of these are likely to be enough if business travel demand remains subdued for years to come. 

On the other hand, airlines are probably not going to rush into physically reconfiguring their cabins just yet. With the recent easing of travel restrictions and increases in passenger figures, there may be just enough simmering optimism to remain in wait-and-see mode for the coming months. Reconfiguring cabin layouts may not be worthwhile now that so many more radical changes to aircraft cabins have been floated in response to the pandemic. Flipped middle seats, double-decker cabins, permanent dividing screens and group seating are just some of the design ideas that have been presented. Any airline seriously considering one of these longer-term solutions is unlikely to take on short-term reconfigurations. 

Airlines are highly dependent on selling pricier and more luxurious options to premium customers, so there are no easy answers here. Given it is expected to take years for demand to return to pre-pandemic levels – if it returns at all – airlines are likely considering all of the above options and more.