A year and a half ago we published a blog with a similar title, and last year we updated it. At the outset of a third Covid year, it is timely to look back at our earlier thinking and to offer some predictions for 2022.
Our thesis in 2020 was that Covid would profoundly change the airline business forever. We were right and change continues. Unlike previous severe downturns, Covid fundamentally changed customer behaviour. Perhaps the most formative change in behavior has been the substitution of Zoom conferencing for business travel. While some may argue that this trend would have happened anyway, there is no doubt that Covid accelerated it by many years.
Business As Usual? Not for Business Travel!
Having misjudged or downplayed the effect initially, airline executives are increasing admitting that business travel is not coming back quickly and that it may take years to reach earlier levels. When Covid first hit, Bill Gates’ prediction that 50% of business travel would not return had thoroughly shocked the travel industry. Meanwhile, research conducted by the Lufthansa Innovation Hub indeed confirmed this trend, at least for certain segments of business trips, with corporate training and conference travel being slashed most severely.
This decline is being felt foremost on international long haul routes served by wide bodied aircraft. The viability of these expensive wide-bodied aircraft requires large numbers of high yield passengers, belly hold cargo, and hub feeder flights.
The 3 largest US carriers with mixed wide and narrow bodied fleets have lost overall market share to narrow bodied operators. Short distance trips have come back more than long haul for the benefit of narrow-bodied operators like JetBlue, Frontier, and Alaska. Some of these operators are using the longer range capabilities of new narrow body jets to operate on selected transatlantic routes. Even serial airline founder David Neeleman is publicly discussing transatlantic plans for his latest startup Breeze with its brand-new fleet of A220s. All this is putting further pressure on wide-bodied operators.
There is a new type of pseudo-business travel emerging. The explosion in work-at-home options has meant that some people live far away from their corporate office, and only visit occasionally. Some employers have gone a step further by offering work-from-anywhere positions. Bloomberg reports that Yahoo Japan allows its 8,000 employees to work from anywhere in the country, and will allow them to “commute by plane” when the job requires. High quality of life regions are capitalizing on this trend with adverts to lure exactly this type of workers to their city.
Loyalty Programs Too Much Focussed on Business Travellers
Before Covid, most loyalty programs focussed on rewarding business travellers that flew frequently. So far most programs have simply extended the expiry dates of customers’ status levels. Many of these programs, however, may need to be reinvented or recalibrated to address the new post-pandemic travel patterns. Credit card points for instance, may take on more importance than frequent flier miles for leisure and work-from-home travellers.
We see an opportunity for airlines to introduce loyalty programs that cater to those travellers that buy their own tickets to fly from their homes, where they work, to visit their offices where they used to work.
Implications of More Leisure Traffic on Cabin Configurations
Since leisure passengers pay less than business travellers, it will become harder to justify wide bodied flights even with high density configurations. It will also be harder to make a business case for abundant lie-flat seats, many of which will go unsold. Such seats are heavy and reduce the seat count substantially.
Not all leisure passengers will settle for cramped 3 abreast seating. Airlines may want to innovate with more comfortable traditional seats, albeit with lower density and more comfort features than standard economy seats. Such premium economy seating can be very efficient and comfortable in narrow and wide bodied aircraft and could be offered at price between economy and business class. Lufthansa CEO Carsten Spohr recently confirmed that premium economy is now their most profitable cabin segment. In our blog in early-2021, we foreshadowed this trend by leisure passengers to book premium economy type seating
Less dense premium economy seating may be more popular with those who worry about infections, too.
Pricing and Revenue Management Needs to Review Booking Flexibility
Prior to Covid, most airlines used sophisticated revenue management systems that may no longer deliver their intended results. A key feature was advance purchase of seats at low prices, usually with high fees to change bookings. Now many passengers are reluctant to commit to booking because of Covid uncertainty. Airlines reacted quickly by reducing or eliminating change and cancellation fees just in case the passenger became uncomfortable to fly because of Covid fears.
In effect the economic risk of “no shows” has thus shifted from the passenger to the airline, partially or fully. Hence, airlines are forced to rethink how they price and revenue manage their inventory to give Covid-wary consumers flexibility while at the same time achieving good yields and load factors.
B737 and A320 Aircraft Demand is Likely to Grow
These trends are increasing pointing to route networks dominated by point to point narrow-bodied services and fewer hub connections. As one of us started in the airline business under the tutelage of Robert Crandall, he remembers his insistence that smaller airplanes are cheaper overall and more nimble to schedule. He was right about smaller aircraft then, and he will be proven right again. Case in point: The demise of the A380, the last of which rolled off the production line in December 2021, versus the record order book that Airbus holds for its single aisle family, totalling of 6314 units. These aircraft are all the more attractive because new long range variants such as the A321XLR boast seat mile costs at or below those of their wide body rivals.
Air Freighter Demand Growing
Early in 2020 when airlines began reducing their wide-body schedules, we noted the forthcoming severe shortage of belly-hold cargo capacity. We were right and airlines globally reacted by converting and purchasing freighter aircraft to fill the void. This trend continues.
In addition to the need for air all cargo to substitute for belly capacity, Covid has lead to increasing interest in all cargo air to replace ships by some shippers that may not have previously considered air cargo. Repeated port closures and the ensuing supply chain disruptions have re-educated shippers to the reliability and speed of air cargo. Some shippers found that air cargo offered superior reliability and will prefer air in future, even if they have to pay more than with ships. McDonald’s recently discovered that even American French Fries could be economically flown to Japan to bypass shipping bottlenecks in Vancouver since some freighters fly half empty westbound.
We believe that the rush to increase all-cargo capacity will ultimately result in some over-supply until an equilibrium is reached, but at this point there is still plenty of scope for growth.
Still No Alternative to Guerilla Network Planning
We coined this phrase to apply to the ongoing experimentation with routes and networks that airlines are testing on all continents. This trial-and-error process became necessary because the standard “auto-pilot” planning tools, no matter how sophisticated, were useless once the pandemic created havoc. OAG statistics confirm this phenomenon, and it will likely continue for some time after the worst of Covid is behind us.
Brock Friesen and Horst Findeisen