With business travel at American Airlines down more than 95 percent compared to last year, the airline has made what might be a lasting juke. This winter, it will be a leisure-oriented airline, focused on taking customers from the cold to warm-weather destinations in the southern United States.
And if those passengers demand deals, American will discount its tickets. It needs to fill its airplanes, and it knows the business customer willing to pay a premium from New York or Los Angeles is not returning soon. Leisure travelers won’t help airlines close the gap compared to pre-Covid revenues —in October most airlines are flying at about half the capacity of last year, according to analyst Brett Snyder — but at least they will help carriers build cash flow and keep the operation going.
“The customer is changing,” Vasu Raja, the airline’s chief revenue officer, said Wednesday at the Cowen 2020 Global Transportation & Sustainable Mobility Conference. “Historically, the network airline business was really leveraged around a small percentage of customers who flew with us disproportionately for business.”
Among the largest U.S. airlines, American probably has made the biggest change in its model, switching from a corporate travel-oriented airline to a leisure-focused one over just a few months. But others are also re-thinking how they conduct businesses so they can cater to leisure travelers that want to go to Florida and Arizona, not San Francisco or New York.
“We have to adjust our operation, our scale, our network to where customers want to go and who those customers are,” Delta Air Lines Chief Financial Officer Paul Jacobsen said.
Last week, most larger U.S. airlines said they would stop charging change fees on all tickets except their cheapest basic economy fares. During Wednesday’s event, executives suggested the changing nature of their customer base may have had something to do with that move.
Historically, leisure travelers book early in the booking curve. They know their plans far in advance, and they want to lock in the best deals, fearing they will pay higher airfare if they wait. But during the pandemic, several executives said, consumers have been waiting until the last minute to buy. And because demand remains low, this summer they didn’t always pay more for their tickets because they waited.
“We’re seeing the booking curve really shift much tighter than normal, which makes some sense,” Alaska Airlines Chief Financial Officer Shane Tackett said. “I think people are a little reticent to plan too far out right now, just given the uncertainty.”
Generally, airlines would prefer the cash up front, so they have some guarantee of future revenue. By dropping change fees, they may be able to persuade people to book earlier, since customers will know they can keep the value of their ticket if they cancel.
Still, Delta’s Jacobson said it’s possible the change in the booking curve could be semi-permanent, particularly if business travel does not return in a timely manner. Airlines typically try to leave empty seats for late in the booking curve so business travelers can grab them at high prices, but if they don’t resume travel, those seats could be open last-minute for everyone, at reasonable prices.
“If business travel doesn’t fully recover to the level because of Zoom technology, et cetera, or people combining trips, we need to adjust our business model,” Jacobson said. “If the leisure booking curve is suddenly shorter because people have learned the value of spontaneous trips, then great. We need to be there to be able to do that.”
Who Are the Customers?
In the before times, a substantial chunk of American’s customers were older than 40 and flying on business, often from coastal cities. This group may not return, “until we are deep, deep, deep into vaccine penetration,” Raja said.
But over the summer, American saw a different group of customers emerge, Raja said. They were younger than 40, and while they still might leave on a Monday and return on a Thursday, they were going to Daytona Beach for vacation, and not San Francisco for work.
“There’s people out there right now, and so we need to go and build a relationship with them,” Raja said. “And a lot of how we’re thinking about, as you call it, winning the recovery is bringing new customers to air travel and graduating them to higher tiers of loyalty.”
This is also a group that can be stimulated with low fares, Alaska’s Tackett said. In March and April, most consumers would not even fly if the price was nearly free. But that’s over. Discounting is now spurring ticket purchases.
Last month, Alaska launched a buy one, get one free sale for flights through October. “We weren’t expecting it necessarily to drive a ton of stimulation, but it did outperform what we had thought was going to happen,” Tackett said. “It’s been good to see and gives us a little bit of hope for optimism.”
There’s some question about whether discounting is the best move for the health of the broader airline industry. Perhaps, one theory goes, airlines should keep prices high and rely on customers who need to travel. But Tackett said that’s the wrong move for Alaska.
“It does take the right messaging and the right value proposition to get sort of that marginal person who is in the middle of, ‘I would fly, but I’m just not focused on it. I’m not thinking about it,'” he said. “You’ve got to grab their attention and sort of bring them back in.”