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With their businesses cratering, most U.S. airlines are staking out their short-term future on one customer segment that has proven resilient in nearly every downturn — travelers visiting friends and relatives. But as Covid-19 cases rise in the United States and some states enact new restrictions on movement, that strategy will be tested.
The latest airline to chase this market segment is JetBlue Airways, which reworked much of its network last week to attract more travelers seeking to fly from the Northeast to Florida, Puerto Rico and the West Coast. Its press release specifically called out “small signs of recovery” in “visiting friends and relatives travel,” along with traditional leisure travel.
American Airlines, which usually makes much of its revenue on corporate business, made a similar move, joining airlines that already specialized in the space, including Southwest Airlines, Allegiant Air, and Spirit Airlines. With almost no business travel expected this summer, airlines have little choice but to go where they find demand.
The visiting friends and relatives market segment, usually shortened as VFR, is different than traditional leisure. The standard vacationer needs a hefty budget plus somewhere to go, such as Disney World, Las Vegas, or just a beach hotel. But a VFR traveler needs only a friend or a relative to stay with, potentially making it an easier and cheaper proposition than a pure vacation. It may also be safer, since travelers could interact with fewer strangers than at a resort hotel or theme park.
“VFR is the easiest thing to do, and that’s where the demand should be right now,” said Brett Snyder, an airline analyst. “You are not relying on a destination to open. You are not relying on social distancing. You just get on an airplane and go see someone you wanted to see for months.”
Usually Not A Big Money Maker
In typical times, VFR customers generally are not a high priority for medium- and high-cost airlines. These carriers typically need higher yielding business and leisure travelers, who pay higher prices for a slightly evaluated experience. When they do cater to these customers, non-discount carriers often segment them into basic economy products.
Even now, the market segment probably is not profitable for any airline except ones with the lowest costs. But carrying VFR travelers can produce cash, needed by airlines to fund their short-term activities. In its release highlighting the new routes, JetBlue noted the flights would at least generate revenue and keep crews and airplanes busy.
“Keep in mind, they are not going to make money on it this year,” said Jay Shabat, senior analyst at Skift Airline Weekly. “They’re more saying, ‘We are just managing this business for cash.’ They are not going to worry about their fixed costs.”
However, even in normal times, the lowest-cost airlines, such as Allegiant and Spirit, are happy to fill planes with VFR travelers, because their costs are so low that they can squeeze profits from them. Last year, Allegiant’s unit costs, not including fuel, were 26 percent lower than JetBlue’s, so Allegiant may make money with a fare on which JetBlue cannot.
Allegiant is betting its low costs and unique market niche will help it emerge stronger after the pandemic. It is banking on more attractions opening later this summer, including Walt Disney World, but has already won more business in the early recovery period than its competitors by focusing on the VFR segment.
On Memorial Day weekend, when many attractions were closed, including Las Vegas resorts, tiny Allegiant said it was responsible for 8 percent of all the nation’s commercial air traffic, four times more than last year. Some customers were traveling on pure leisure, but many were visiting friends and relatives.
Allegiant later this summer expects to further expand its schedule to leverage increased VFR and leisure demand, CEO Maury Gallagher said in a shareholder letter filed Tuesday to the U.S. Securities and Exchange Commission.
“We believe Allegiant will lead the charge out these depths,” he said.
As May ended, many airline investors again turned bullish, hoping improved leisure and VFR traffic signified the industry had entered a lasting rebound. The enthusiasm continued into June.
But this week, more U.S. states have reported higher numbers of Covid-19 inflections and hospitalizations. Meanwhile on Wednesday, governors in New York, Connecticut and New Jersey said travelers arriving from hotspots, including Florida and Texas, would have to self-quarantine for 14 days. CNN reported New Jersey’s quarantine applies to all travelers, including those returning home.
It is not clear how strongly these policies will be enforced, however. Other states, such as Florida, have enacted quarantines, while not doing much to ensure travelers comply.
It is also not clear how travelers will assess risk from the virus. If customers bought tickets believing the first round of local lockdowns in March and April had eradicated Covid in the United States, they may be skittish about flying and may cancel their tickets. Most airlines are waiving change fees, so canceling would not cost customers money.
But it is also possible customers bought tickets understanding the risks. These people may be willing to fly, even if cases are up. They may not want to cancel on friends and relatives, and may crave the close social contact after months of isolation.
American and JetBlue said in statements Wednesday they were monitoring developments. Neither said it had altered its schedule because of the new quarantines. Both said customers who had changed their minds could change their flights for free.
“We are aware that some states are placing new quarantine requirements for customers arriving from other locations,” American said in its statement. “For those traveling domestically, we strongly encourage all of our customers to check with state and local governments in the places they are traveling to so they fully understand and are able to comply with any requirements upon their arrival.”