Last week, many airlines held earnings calls with investors. One American Airlines investor raised questions about the future of business travel.
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American Airlines Earnings Q1 Call
One of the world’s largest carriers, American Airlines, held its Q1 Earnings call this week. The carrier has been boastful in the weeks leading up to the call about bookings returning to 2019 levels – though it turns out that a significant caveat was due.
The carrier lost more than $4bn during the reporting quarter and retains $19bn in cash-on-hand. Every American is now a stakeholder in the company’s Advantage loyalty program and has bailed out the carrier several times. I found it rang a little hollow that they reassured investors about the substantial amount of cash-on-hand while threatening employees (and the traveling public) that massive layoffs would result without another bailout.
The carrier plans to begin hiring new pilots and “tearing up” furlough documents as demand has returned for the domestic United States market.
Investor Raises Question About Future of Business Travel
Each earnings call features questions asked live by investors. Usually, these paint a little color on the state of the business and rub off some of the prepared veneer that executives apply. An analyst from Wolfe Research asked a question that was initially rebuffed by management.
“Hunter Keay — Wolfe Research — Analyst
Hey, thank you. Good morning, everybody. So business travel, it’s always been, obviously, a little bit more cyclical and riskier, but higher reward. Leisure travel tends to sort of endure and recover better.
So you knew that. But as you drive out, whatever, $2 billion in cost, you densify your aircraft, is there a thought maybe that you don’t want as much of that corporate share on the other side of this? And then maybe, obviously, I know business travel is important to you. I understand that. But maybe like an 80-20 leisure business mix makes more sense for American longer term, given your network footprint and the cost savings and the seat densification and all the other factors just around the periphery.
Does that make sense?
Doug Parker — Chairman and Chief Executive Officer
No, we don’t think so. And again, we think — actually, we’re building a network that will serve business better than their network, and we’re excited about that. So as soon as travel returns, we’re building the airline to be there for them. And I think we’ll be able to do that as well or better than anybody else.”
Most executives don’t reply so directly. Typically a response would be more along the lines of, “that’s a great question and something we have been exploring. But for the long term, we feel corporate travel is destined to return but are open to the shifting environment we find ourselves in.”
Kudos to Mr. Parker for answering directly, listening in, I was shocked to hear such a sharp, candid response.
However, after reviewing what Keay asked, it raised further questions about what the market will look like in the future. He’s seeing that maybe the future of business travel is limited in scope. Perhaps American Airlines could be ahead of the pack by reconfiguring aircraft, even if just for the next few years, to more dense configurations for price-sensitive consumers.
Some of that theory has merit. Consider the flagship of American Airlines fleet, the 777-300ER. Business Class extends to the wings, halfway through the aircraft, and premium economy extends back past that. Removing the (8) First Class section from these planes and replacing them with Business Class from the middle of the aircraft could allow the carrier to add a significant number of seats in either economy or premium economy. That makes a lot of sense as these aircraft are flying Miami to Los Angeles instead of Los Angeles to Hong Kong.
If the future of business travel is fewer flights, fewer travelers, and less frequent trips, the airline would be smart to jump on this opportunity.
Why Business Travel May Never Return to Prior Levels
Keay was looking at the metrics and applying his knowledge of the current state of business travel to the market. Many companies that didn’t see the productivity they’d like to from work from home arrangements prior to the pandemic were thrust into it in a “do or die” situation. Most of those were able to install remote working systems to overcome the inability to hold face-to-face meetings.
Companies realized that they can still conduct business without the same frequency of servicing accounts. Last year, companies replaced travel budgets with technology costs but in the future travel savings may outweigh the technology increases. The business travel industry has not recovered with the same fervor as the leisure market has and some have suggested it won’t for several years if ever.
Executives who lived on the road didn’t have the same enjoyable travel experience as leisure travelers and a year spent at home spending real time with friends and family may have broken the model that it’s a requirement to fulfill their duties. Consultancies and management companies that dominated the frequent flyer rolls have found they can still charge high rates without appearing in person to deliver presentations.
Companies and those most voracious road warriors may not see a need to ever return to the skies and hotel hallways as they once did.
Why It Absolutely Will
Customers and businesses understood that they couldn’t meet in person during the pandemic. Health and safety issues won’t remain the same level of concern going forward. As that changes, in-person meetings will return. Zoom fatigue is real, and many business people can’t wait to get back out and do what they loved before the world shut down.
For salespeople, if you’re not visiting your clients, another salesperson will. Travel managers may not understand that initially, but with time as the world returns to normal, sales will drop without interaction.
The world craves a return to normalcy and that means business travelers back out on the road.
Conclusion
Mr. Parker knows where his bread has been traditionally buttered and was quick to shut down the notion. He and the team may have started at America West then US Airways, but they know they don’t want to be in the tumultuous business of offering discounted fares to fill even more seats on premium aircraft. But the analyst’s question makes more sense for the current structure of the traveling public than initially thought and perhaps American’s management team should reconsider their position.
What do you think? Is the future of business travel less frequent? Should American reconsider packing planes with tourists for the interim?
May make sense to replace many business class seats with premium economy.
Many businesses are simply not paying for business class. Meanwhile, PE looks a lot like 1980s business class. Maybe go back to the product that was designed for business travel in the first place
This is totally anecdotal, but I have come across clients in a B2B environment who seem pretty happy to with the realisation they don’t have to accommodate regular visits from sales reps, make them tea, and listen to things about which they may have limited interest (whether in terms of general pleasantries or cross-selling attempts). The ‘go and visit your clients or someone else will’ type of thinking is outdated, particularly when the client happens to be a large organisation with a bunch of people working from home who won’t be that enthusiastic about having to spend hours travelling to/from the office just to talk to a salesman or a team of management consultants.
That’s not to say that business travel is dead, but the mix will almost definitely be different. Airlines should stop looking at it as the goose that lays golden eggs, and instead think about improving their premium leisure offerings (across all classes of service, even as add-ons to bog standard Y). The latter are often pitiful, particularly when it comes to short-haul travel- e.g. ‘premium class’ products with limited/no lounge access, convertible Eurobusiness seats with 30″ pitch, skimpy catering and so on.
This is totally anecdotal, but I have come across clients in a B2B environment who are very frustrated with not having any face time with customers.
We are starting up international travel at my work in Q4. First trip? Going to a bit trade show in Europe.
Zoom is awful, and it makes every conversation a ‘transaction’ – not a relationship.
Relationships are what made our business grow. They are why we succeed.
With our suppliers, with our vendors, with our partners. Relationships matter.
And you don’t make relationships on Zoom, I can tell you that after a year of trying.
Totally awful, and not human.
I would bet a sizable amount business travel will be bigger than it ever was, in just a few years.
There is nothing that replaces face time. Not in any business I’ve been a part of.
I can only speak for my business, but my colleagues/peers are not interesting in travel as long as there are limited services and mask wearing. I realize it may be a long time – if ever – that mask go away. However, we have all discussed the “mask” issues on planes which appear the norm – an the response by FAs who seem embolden. Having said that I have great respect for them and right now its a really tough job.
My team doesn’t seem interested interested in flying to Asia for 14 hours in a mask.
@George, business travel is bound to grow as Asian countries (and even some African ones such as Ethiopia) become ever wealthier and more populous. The question is whether it will reach the same proportion of total travel that it used to comprise, and that bit doesn’t look very likely.
Masks need to go on planes at least on domestic flights this year and soon on intl to places that have low spread – which will be many soon. It will hold back biz travel until they are removed
I think business travel will be very different. No more traveling just for the sake of traveling. Attended a webinar the other day with a large European investment bank. The lady said she had times she would fly from London to NY 3 times a week for a 1 hour meeting with clients. That is gone not only because of cost but also because most of these banks now have to show they are sustainable and reducing carbon footprint. Yes, they have to issue sustainability reports and showing they fly an executive 3 times per week over the pond to meet with a client for an hour doesn’t look good. Also, conferences will change. Most people attended conferences as an excuse to be away of home and gain miles. Most conferences are useless. They will become virtual. Now, one area I think it will increase is domestic business travel. I know many people that have decided to no longer live where their company is located. However, they will have to travel to the HQ once in a while. That wasn’t the case befy. Also, some cultures don’t work via Zoom. Latin America and Asia needs face to face meetings to close deals. Thus, business travel will continue but very different than before. No more BS travel but only what is necessary.
I agree with @Santastico . First time ever…