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Those Business Travel Chickens That Airlines Were Counting? They Aren’t Hatching

Date: September 12, 2021

By Dan Reed, Forbes

Seven weeks ago, U.S. airline executives were clucking excitedly about a return to profitability this year after the near-total collapse of travel demand in 2020 due to the the coronavirus pandemic. Now they’re relearning the meaning of the old advice against counting chickens before they hatch.

As the second quarter came to a surprisingly profitable close for most U.S. carriers, it was hard to find anyone in the business who wasn’t forecasting at least modest profits in the third and fourth quarter. They were all but certain that a big recovery of business travel demand was going to pick up right where the surprisingly strong surge in summer leisure travel demand was expected to leave off once kids went back to school and tens of millions of Americans returned to their offices, many for the first time since March 2020.

But now the industry will be lucky if more than two of its members report small third-quarter profits – and none of them are yet willing to even talk about their profit prospects for the fourth quarter. Thanks to the unexpected jump in Covid-19 cases driven by the spread of the so-called delta variant of the virus, leisure travel demand began softening a bit in late July, and then by more than a bit in August. Carriers, including Southwest, which historically has had the industry’s best understanding of leisure travel demand, also began reporting that not only were customers canceling or postponing leisure trips in August, but that cancellations of September and October trips were rising rapidly and sales of new fall fun trips were much weaker than previously expected.

Worse, by mid-August most airlines also began worrying quietly – and more recently not so quietly – that the expected rebound in business travel demand was failing to materialize.  And while the delta variant certainly is playing a big role in that shortfall in the number of fall business trips being booked, for the first time, leaders in and around the airline and travel businesses are beginning to seriously consider whether business travel may not come all the way back any time soon to where it was before Covid-19 entered the picture. Indeed, some are now actually beginning to contemplate whether it ever will.

The American Hotel & Lodging Association recently surveyed corporations and individual business travelers around the U.S. and learned that 67% of them now expect to take fewer trips going forward.  They also discovered that 52% of them are likely to cancel existing travel plans for the months ahead and, importantly, won’t rescheduled those trips for later. And 60% are planning to, at a minimum, postpone existing plans for business trips in the months ahead.

To be sure, demand patterns for hotels and airlines are different from one another. Lots of business travel gets conducted by automobile, or even train — not by airplane. But the picture painted by that AHLA survey is that of a consequential, prolonged or even semi-permanent secular decline in business travel demand. If that picture is even close to accurate, it will impact airlines just as much, if not more than the hotels because airlines structurally always have been even more dependent on the revenue they get from business travelers than have been hotel companies.

“Business travelers are all standing around the edge of the pool, trying to figure out who’s going to jump in,” Marriott CEO Tony Capuano said in an interview last week with Business Insider. But like a lot of travel industry leaders, Capuano is banking on competition among businesses for the business of their customers eventually to drive the long-awaited return to pre-Covid-19 levels of business travel demand. “What happens when your biggest competitor chooses to actually make that [seemingly extravagant trip to meet a customer] and wins the business?” he asked rhetorically. The obvious suggested answer to which he was alluding is that those businesses that seek rein in their travel spending going forward eventually will be compelled by competitive forces to go back out on the road just as much as before.

Unfortunately, there’s simply not enough data or actual experience – yet – to prove or disprove that line of thinking.

But for now, at least, the recovery of business travel demand has gone into a worrisome stall.

Raymond James airline analyst Savanthi Syth issued a report late last week noting that the nine largest U.S. airlines all have revised their third-quarter revenue forecasts significantly downward since mid-August as the weak demand numbers became obvious.

Syth said she is “positively surprised” that the revenue forecast reductions made by JetBlue, Delta and Alaska airlines were more modest than those made by their rivals, but “negatively surprised” by the especially large revenue forecast reduction issued by American.

United actually made the largest cut in its third-quarter revenue forecast, but that cut was in line with Syth’s expectations because United has more combined exposure to business travel markets, international travel markets and business travel markets up and own both coasts, all of which happen to be where travel demand is weakest.

Delta now forecasts that its third-quarter revenue will be down by between 33% and 35% from what it was in the third quarter of 2019, before the pandemic. Previously Delta had forecast a revenue drop of 30% to 35%.

Alaska Airlines’ forecast for third-quarter revenue worsened to a drop of between 19% and 21% vs. its previous forecast decline of 17% and 20%.

JetBlue now expects third-quarter revenue to drop 6% to 9%, vs. 4% to 9% previously.

American, meanwhile, now expects its third-quarter revenues will be down by between 24% and 28%. Just a month ago American was forecasting that drop to be only around 20%.

Southwest now expects its third-quarter revenue to be down by between 18% and 20%, compared to 15% to 20% before.

United, meanwhile, now says its third-quarter revenue will be down about 33%. Previously United was forecasting a revenue drop closer to 26% or less.

Syth pointed out that all U.S. carriers are using softening demand levels this fall to reduce their flying capacity, operational cutbacks that also could reduce the pressure that carriers experienced this summer when they struggled to staff all the flights that they had scheduled. As a result of that labor shortage, U.S. airlines canceled thousands of flights this summer, upsetting passengers whose travel plans were disrupted.

Southwest officials say they expect to cut nearly 2,700 flights from its third-quarter schedule as a response to the lingering effects of Hurricane Ida on travel demand in areas impacted by that powerful storm. Other carriers, to varying degrees, likely are feeling the negative effects of the storm as well. But the Dallas-based king of the discount carriers says that even after making those schedule cuts, its third-quarter capacity will be within about 5% of where it was in the same period in 2019. Before the recent forecast revisions and Hurricane Ida, Southwest was expecting its capacity in the current quarter to be about even with 2019. That’s a clear indication of just how aggressive Southwest’s management has been about rebuilding its operation and service schedule since its Covid-19 nadir in May 2020.

“A silver lining,” Syth noted, is that scaleback in flight capacity this fall, “comes around the time of 2022 budget planning, likely injecting some caution following the [airlines’] exuberance of the strong summer demand backdrop.”

While the negative revenue forecast revisions seem to have caught airline managers by surprise, investors do not seem to have been similarly surprised. All long-established U.S. carriers have seen their stock prices slide downhill over the last six months even as they talked up the strength of the leisure travel demand recovery they were seeing. Since peaking in early April, airline share prices have declined by between 21% and 37%.

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