SEAT 2B | By Joe Brancatelli
Big Changes for Business Travel
Tuesday, March 17, 2009; 11:17 AM
With a sharp drop in demand for premium-class seats and a long-term decline in airline revenue, global commercial aviation may be getting a permanent makeover. Things we take for granted today -- relatively frequent flights for frequent business travelers and cheap coach travel for vacationers -- could disappear. At a minimum, there's sure to be another round of convulsions in the low-margin, capital-intensive airline industry.
Before we discuss the future, understand the present. This week, the trade group IATA releases its statistics for premium-class travel and the January numbers will add another double-digit decline to a slump that is wreaking havoc with global airline revenues. What started as a leak -- a 1.5 percent drop last August -- became a full-on crisis by December, when year-over-year premium revenue tumbled 13.3 percent. And since the first quarter of every year is historically a miserable time for premium travel, airlines are likely to report dreary numbers for at least the next few months.
The short-term economic impact of declining first- and business-class travel comes with some happy little benefits for those of us who dip into our wallets (or our company's budgets) to fly in the front of the metaphoric bus. Prices up front plummet. Elite travelers who pay to sit in coach on domestic flights suddenly find themselves upgraded to first class with delightful regularity. And the frugal flier finally gets to cash his frequent-flier program credits.
Most airlines are dangerously dependent on a precious few up-front fliers to balance their balance sheets. Estimates vary by airline and route, of course, but as much as half of a carrier's total revenue is generated by premium fliers -- and they represent fewer than 20 percent of the passenger count.
Consider this extreme example: A walk-up business-class ticket on the so-called Nylon route between New York and London costs $11,700 roundtrip. (Transpacific flights in business class can command $20,000 roundtrip and first class can cost upward of $30,000.) Few pay walk-up prices, of course, and most premium Nylon fliers are corporate types on negotiated discounts with fares of around $5,000 roundtrip. By contrast, a coach ticket on the route can cost as little as $500 roundtrip. So every time a single premium-class flier goes missing, an airline flying the Nylon route has to find upward of 10 coach travelers to replicate the revenue.
As the IATA numbers show, premium-class fliers are beginning to disappear. Some have temporarily stopped flying as the global recession lessens the need for travel. Others have been asked or commanded by their employers to move back to coach for the duration. Most worrisome for airlines, however, is the historical reality: Every financial downturn has led to a permanent decline in the number of up-front fliers.
After the first Gulf War, enough premium-class fliers disappeared forever that many international carriers -- including Continental, Delta, Northwest, US Airways, Alitalia, KLM, and SAS -- scrapped their first-class cabins. On domestic flights, airlines severely degraded their up-front offerings. After 9/11, still more premium fliers went away and airlines switched to smaller planes, reducing the size of premium-class cabins internationally and eliminating first-class seating on routes switched to regional jets. (These smaller planes now account for 20 to 85 percent of the traffic at the nation's 40 largest airports.)
Each recession has also led to tougher corporate rules for so-called "entitled travelers." Firms that once permitted domestic first-class travel for routes longer than three hours forbade it on all but transcontinental routes, then eliminated the perk completely. Companies that once permitted international business-class travel on routes of six hours or longer widened the window to eight, 10, or 12 hours. More than a few now require coach travel even on the longest transpacific flights.
So what happens if another sizable proportion of business travel disappears forever? Not all of the airline executives I've talked to in recent weeks agree -- and none would even talk for the record -- but they made some predictions based on previous experience and the current warning signs.
Fewer frequencies on the most popular routes. The cheapest, easiest, and least painful (at least for the airlines) way to cope with a long-term decline of premium-class revenue is to ground aircraft and offer less frequency on routes that offer multiple flights each day. That's already happened to some degree as domestic carriers cut about 10 percent of their flights after last Labor Day. An international cutback seems inevitable. Last week, Delta Air Lines, which aggressively expanded its overseas network in the last four years, announced it would slash about 10 percent of its international service in the fall.
Fewer nonstops on less popular routes. Many cities still connected by nonstop flights today will lose their service. As premium-priced business travel falls, the airlines have less incentive to fly those routes directly. They'll force travelers to connect via hubs, where the carriers can "collect" passengers from several cities and then reroute them in bulk to their final destinations.
Fewer premium-class seats. Airlines are loath to reconfigure their planes because it is costly, but a permanent decline in premium-class travel will require a change in aircraft "geography." Airlines will rip out unsold premium seats and replace them with more coach chairs. US Airways recently reconfigured its domestic fleet with fewer first-class seats, and United Airlines' long-overdue upgrade of its international aircraft will result in 20 percent fewer premium-class seats.