The New Complexion Of Business Travel For U.S. Airlines
While airlines aren’t out of the woods yet, the recent uptick in booking volumes are a welcome sign for the industry. So, as airlines emerge from this “holding pattern” of hyper-focus on cash conservation and survival, some interesting and potentially long-lasting dynamics are developing. One of those is airlines’ approach to the business travel segment, and how they are adjusting their strategy in response to its recovery.
Leisure gaining more mindshare from airlines
Pre-pandemic, market share growth in the business segment – given its high yield, relative inelasticity and very loyal nature – was front and center for most large US carriers. While we’re seeing some positive signs of its rebound, resurgence of business travel will likely be gradual. On the other hand, the strong growth in leisure demand has prompted airlines to bolster their leisure routes and schedules – a major shift away from their pre-COVID strategy. United Airlines’ announcement in March to serve non-hub, leisure destinations from Cleveland, another non-hub city, is a prime example of this shift, as an action like this was inconceivable a year ago. Delta and American Airlines made similar announcements to serve and expand service to traditionally leisure routes. Southwest, a predominantly leisure and domestic focused airline, will return to 96% of pre-pandemic capacity by June. As global vaccine roll-outs continue to expand and foreign entry rules begin to ease, we will see a similar trend with international travel as well. United’s decision to serve Iceland, Greece and Croatia are an indication of that. These network changes are also having downstream implications on other commercial functions. For instance, some airlines are adjusting their value propositions by allowing the use of corporate program discounts for leisure travel. Most have increased focus on key sales channels for this segment – not only online travel agencies, but also specialty channels such as wholesale/tour operators and consolidators. We can expect to see more of this in the months to come.
The new “commuter” segment
An interesting development emerging from the pandemic is the potential change to the make-up of the “traditional road warriors” customer segment. New and well-functioning working models, enhanced technology, work-life balance preferences and cost savings for companies will likely to lead to a reduction in travel by consultants, sales reps and other such profiles that make up this segment. While this may pan out to be true, a new segment – the “commuters” segment – could (positively) offset some of this decline. During the pandemic, most large companies declared a transition to the work-from-home or hybrid working model for the foreseeable future requiring employees to be in the office for only a few days a month. Technology companies, for example, were at the forefront of this. As a result, many employees relocated away from large metros such as the San Francisco Bay Area to smaller cities around the country is pursuit of lower taxes, proximity to close ones or for a better lifestyle. But as physical offices begin to open, employees will likely have to frequent their companies’ offices. Google went as far as to announce limits on the future of remote work. This shuttling from their new locations of residence to their office locations will create a new segment of “commuter” travelers opening the door to service or increased frequency to/from new cities – hubs to/from Billings, Montana or Salt Lake City, Utah, for instance. Carriers can also pursue new customers with their loyalty programs and status levels, and even tweak their value proposition to address the needs of this new business travel segment.
New airline-corporate partnerships
Even as airlines bring back much of their capacity, they aren’t flying to the same destinations, with the same frequency or with the same schedule as they were prior to COVID. As a result, many airline agreements corporations previously had, largely driven by the fit of their the needs and locations with an airline’s route network, may not be optimal anymore. So, corporations may shop around for new partnerships uprooting the previously, relatively well set corporate-airline preferred relationships. In addition, if the commuter segment grows into a noteworthy component of corporate travel programs, it will further upend status quo, setting the stage for a major shake-up in corporate-airline relationships. But while this poses a threat to all airlines, it is also a once-in-a-decade-or-two type opportunity for airlines to win and penetrate corporate accounts they have been vying for many years.
(Even more) Focus on SME
While business travel as a whole shrank substantially, the Small and Medium Sized Enterprises (SME) sub-segment within business travel has been a relative bright-spot in the industry, not just for airlines but across the travel industry. Given the current demand constrained environment, the focus on this segment has moved up on the priority list of many companies. But while this is and always has been an extremely attractive business travel segment given its aggregate value, it is highly fragmented and relatively unmanaged making it difficult to target, capture and retain. Pursuit of this segment will require meaningful investment in developing supporting organizational, technological and analytical capabilities – a potential roadblock in these cash-strapped times.
Some of these shifts will be temporary and airlines will revert to pre-pandemic ways in a few areas. But others will require more foundational and systemic changes that will be difficult to reverse and will have more sustained implications than many believe today.