By Jaap Bouwer, Steve Saxon, and Nina Wittkamp
As they look beyond the pandemic, airlines need to grapple with five new realities—and devise strategies to adapt.
It’s difficult to overstate just how much the COVID-19 pandemic has devastated airlines. In 2020, industry revenues totaled $328 billion, around 40 percent of the previous year’s. In nominal terms, that’s the same as in 2000. The sector is expected to be smaller for years to come; we project traffic won’t return to 2019 levels before 2024.
Financial woes aside, the pandemic’s longer-term effects on aviation are emerging. Some of these are obvious: hygiene and safety standards will be more stringent, and digitalization will continue to transform the travel experience. Mobile apps will be used to store travelers’ vaccine certificates and COVID-19 test results.
Other effects, though, are more profound. Unlike the 2008 global financial crisis, which was purely economic and weakened spending power, COVID-19 has changed consumer behavior—and the airline sector—irrevocably.
This article will explore five fundamental shifts in the aviation industry that have arisen from the pandemic. For each of these shifts, we also issue a call to action. By responding to these shifts decisively now, carriers should be able to look beyond the pandemic and adapt to the long-term realities of COVID-19.
- Leisure trips will fuel the recovery
Business travel will take longer to recover, and even then, we estimate it will only likely recover to around 80 percent of prepandemic levels by 2024. Remote work and other flexible working arrangements are likely to remain in some form postpandemic and people will take fewer corporate trips.
In previous crises, leisure trips or visits to friends and relatives tended to rebound first, as was the case in the United Kingdom following 9/11 and the global financial crisis. Not only did business trips take four years to return to precrisis levels after the attacks on the World Trade Center but they also had not yet recovered to pre-financial-crisis levels when COVID-19 broke out in 2020. Therefore, we expect that as the pandemic subsides, the rise in leisure trips will outpace the recovery of business travel.
Some carriers are highly dependent on business travelers—both those traveling in business class and those who book economy-class seats right before they need to travel. While leisure passengers fill up most of the seats on flights and help cover a portion of fixed costs, their overall financial contributions in net marginal terms are negligible, if not negative. Most of the profits earned on a long-haul flight are generated by a small group of high-yielding passengers, often traveling for business. But this pool of profit-generating passengers has shrunk because of the pandemic.
The call: revisit flight economics
Airlines should reevaluate the economics of their operations, especially long-haul flights. First, a smaller contribution from business traffic could necessitate a different pricing logic. For example, today most carriers price point-to-point nonstop flights at a premium. Travelers who value time over price—mostly business travelers—book these nonstop flights. Leisure travelers, even those traveling in premium classes, are more price sensitive and may choose an indirect routing. This large gap between nonstop pricing and connect pricing may need to narrow.
Second, lower business traffic may require network changes. Airlines added many flights over the past few years between hubs and smaller cities, using small-size widebodies such as the Boeing 787. These flights work because of the high-yielding business demand. With business demand subdued, economics favor larger aircraft flying less frequently. Airlines may find that larger aircraft such as Airbus A350s or Boeing 777s—which have lower unit costs—become the base of the long-haul network.
Third, airlines may also look at reconfiguring the layout of their cabins to address the increased share of leisure traffic. At the simplest level, lower business-class demand may warrant smaller business-class cabins. 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 traveling as couples or groups.
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