Five Ways Large U.S. Airlines May Change In The Next Few Years
October 23, 2021
Ben Baldanza, Forbes
(NOTE: This is an Editorial from a former airline executive that appeared in Forbes magazine)
The pandemic has changed the world in many ways, and has benefitted some industries while pummeling others. The airline and travel market in general was especially hard hit, as people stayed home to be safe and governments closed up many spots for long periods. During this time, most airlines leveraged up their balance sheets to survive the crisis until travel returns. Despite this, low-cost airlines have been aggressive and have used their lower cost of production and lack of reliance on business travelers to expand. Two U.S. low-cost airlines went public in 2021, and two new low-cost airlines also started operations.
While the low-cost airlines have grown and shown resilience, the largest U.S. airlines have struggled because of the slow return of the business traveler. Delta Airlines DAL -0.8% positively reported that business travel is now at about 50% of its pre-pandemic level, with the implication that it is on its way back to 100%. This is not certain and not even likely, given why people travel for business and the change in views about travel and gathering for business. As a result, it is the airlines that depend on this business travel that are most likely to change as the travel industry moves out of the pandemic. Here are five changes we could see:
Loyalty Programs For Less Frequent Travelers
Airline loyalty programs have been significant financial contributors for the largest U.S. airlines. These programs and their associated credit card partners generate good income and drive travelers to consolidate their trips on just one or two airlines. But these programs have been designed for frequent travelers, and as such a minority of travelers actively participate in the programs.
With uncertainty in the return of business travel, and even those that fly again may fly less often, the programs are due for a recalibration. If the rate of point accumulation changes, then the value of the points for redemption likely also must change. The most forward-thinking airlines will recognize that less frequent travelers can also be targeted in these schemes. Programs that find a way to create value for the less frequent traveler will build back some of their lost business from a reduction in business travel.
Increased Reliance On Partners
The three largest U.S. airlines — American, Delta, and United — are founding members of the three largest worldwide airline alliance networks. These partnerships are better for some partners than others, but in all cases expand the scope of an individual airline’s network without buying expensive new capital.
These relationships will become more important in a world with less business travel and potentially ongoing labor availability challenges. Connecting a large U.S. hub with a large European, Latin American, or Asian hub with a single flight creates numerous opportunities for customers to reach many destinations. This frees an individual airline from flying some smaller, point-to-point routes but still benefit from the economics of those who want to travel among those cities. Additionally, labor can be shared to some extent by one partner handling partners at one hub airport and being handled by others at a different airports.
Focusing On Points Of Strength
According to a recent Airlines for America presentation, the largest U.S. airlines have increasingly encroached on each other’s hubs over the last five years. That means United flying more in American’s hubs, for example. Going forward, it is more likely that airlines will build their points of strength more rather than try to find revenue in a competitor’s hub. That’s because the economics of hub dominance are substantial, since airlines can win a higher share of the hub’s traffic than their contribution of capital.
United Airlines recognized this even before the pandemic began. Under Scott Kirby’s leadership, the carrier has built up its hubs and in the process has reduced their exposure to low-cost pricing. For example, Denver to Los Angeles is a big route from a United hub that is also flown by Southwest and Frontier Airlines. The fares in that market are priced by the low-cost carriers. By building the Denver hub to smaller markets, United can reduce the number of local trips they sell between Denver and LA and replace these with travelers connecting from a smaller place. They realize higher revenue in this way, and that’s why they have been building up all of their hubs this way. As we emerge from the pandemic, the lowest risk way to add capacity will be in an airlines’ strongest cities.
Re-Configuring For More Coach Seats
If business travel doesn’t recover fully, meaning that some travel permanently switches to video or companies re-think their overall travel spend, the large airlines may find that they have too many business class seats and not enough coach seats. In the short term, the business travelers still flying may benefit because their chance of getting a seat upgrade improves. But because there may be fewer people to pay to sit in these seats, and as importantly a need to lower overall cost per seat, these airlines may choose to re-configure.
This is not a fast decision to make and takes some capital expense (to buy the new seats) and time to do the change. In addition to the seats changing, other items like the lighting and air units above the seats, and the drop-down oxygen masks, may also have to change. But the result would be an airline that better fits the new demand if this were to come about, meaning fewer business seats and more leisure passengers. Since the total seat count would increase as a result, the cost per seat would drop. This helps to offset, albeit a small amount, for the large difference in average rate paid by the leisure customers as compared with the business traveler.
Airline labor costs vie with fuel for the highest cost center, depending on the current fuel price of course. The large U.S. airlines tend to be heavily unionized as well, though Delta avoids this for most of its groups but not its pilots. Pilots tend to be about 50% of the total salaries, wages , and benefits for these airlines, and this is an area where airlines can’t outsource both by their collectively-bargained contracts and practicality. Other areas, including maintenance and most airport functions, can be outsourced in practical terms although union contract agreements may make some or all of this difficult.
Outsourcing is common at many airlines, especially for areas that don’t interact directly with customers. The advantage is that labor can be used more efficiently — the people who load the bags for one flight can do the same for a different airline right away rather than wait for the next company plane to arrive, for example. Administrative functions like I.T. and accounting could also be outsourced, for both labor cost efficiency but also focus. Let airlines focus on what they do best, and let other companies do the rest of the work. In a search for lower costs as unit revenue drops with more leisure customers, this becomes a viable strategy when the contracts allow it.
The pandemic is changing many businesses and our personal lives in interesting ways. Continual adaptation is a highlight of entities that survive for the long term, so these changes may not seem innovative or transformative but will make these big companies more efficient, and aligned better with changing traveler demographics.