During the recent large U.S. airline earnings calls, the companies put a good spin on the business travel environment. While reporting business travel volumes at about they pointed out that business revenues taxi yonkers were back, or almost back, to 2019 levels given higher fares. They also suggested that business travel is still recovering and implied that it will get back to pre-pandemic levels.
But these optimistic outlooks don’t jive with how most are thinking. Reasons like video meeting options, personal risk avoidance, ESG concerns, cost containment, and more have many businesses re-thinking the role of regular travel. The large consulting firm Bain has pledged to travel 35% less as part of their ESG initiatives. Others are saying that there are fewer places to visit with newer work-at-home protocols. These trends suggest that the recovery curve is likely flattening for corporate business and will level out at roughly 80% of volume.
Airlines like United are built to carry business travel, and it affects every part of their business. The network, fleet configuration, loyalty program, airport real estate, staff training, IT and more are all influenced by the volume of business travelers. If the 80% threshold is accurate, it will have significant implications for United and other airlines built like them.
Uncompetitive Cost Structure
United, along with its peers Delta and American, have the highest unit costs among the U.S. airlines. There are many reasons for this, but large among these is the incessant search for higher-fare paying corporate business customers. This affects every part of the business, in ways I didn’t even appreciate when I worked at this kind of airline. Here’s a simple example. Say an airline generally charges for checked bags, but waives that charge for certain customers based on fare paid, frequent flier status, or credit card perk. This simple feature changes the way an airline must train its people, since an agent will need to recognize which customers get the fee waived. It also changes the airport IT, since the agent must be able to print a bag tag for some customers without payment but confirm payment for other customers before printing the tag.
This tiny example is easy to solve, but multiply this by every airline process and it's amazing how much complexity, and costs, this adds. Follow this complication into the fleet, seating configuration, airport real estate needs, and more and soon you’re talking measurable increases in unit costs. The result is that airlines like United can sell low fares, but don’t make money on the low fares unless these are subsidized by others paying higher rates. Now, Southwest at Midway airport in Chicago or JetBlue at JFK have real impact on United hubs in these cities, since discretionary customers will often choose an alternative airport to save some money. In a world where more of the passenger volume comes from price-sensitive customers, the current cost structure of United and similarly-structured airlines are not competitive.
A Product That Isn’t Enjoyable To Fly
Even if the other four things on this list were not a challenge, United is not a particularly friendly airline to fly. Board a Southwest, Alaska, or JetBlue flight and you get the sense that they are happy to see you and want to make the trip enjoyable. Board a United flight, and while this may happen more likely you are treated with indifference at best and animosity at worst. Based on price or schedule, United may be the best option available. but many customers will choose another option if they have one. This is hard to change, and the long history of labor friction makes it even more difficult. United long ago stopped calling themselves “the friendly skies.” The pandemic encouraged larger airlines to offer early-out programs for some of their most senior employees, and this may create a unique opportunity to cause some serious change on the product delivery.
United is a proud and strong U.S. airline that plays an important role in the national aviation landscape. As they did during the pandemic, they can play a real leadership role on certain things. They have strong leadership including CEO Scott Kirby. Yet, continual announcements about things that won’t happen for many years, or complaining about airspace limitations that United benefits from in other geographies, is fine if it doesn’t take the company’s eye off they key things that truly threaten its franchise. Based on their current communications, that is hard to tell.
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