FILE PHOTO: A British Airways plane arrives from London amid new restrictions to prevent the spread of coronavirus disease (COVID-19) at JFK International Airport in New York City, U.S., December 21, 2020. REUTERS/Eduardo Munoz
November 8, 2021
By Sarah Young and Rajesh Kumar Singh
LONDON/CHICAGO (Reuters) – Planes poured across the North Atlantic towards the United States on Monday, a boon for airlines after 19 months of travel restrictions – but that alone won’t be enough for carriers whose profits depend on filling the most expensive seats.
Experts say the real battle of the transatlantic, the world’s most lucrative travel market, takes place at the front of the plane, in first, business, and premium economy class, where those paying the top prices help drive airline profits.
Question marks remain over the pace and extent of the return of corporate travel budgets, after the pandemic showed online calls and virtual meetings offered a workable alternative.
That’s mixed news for the likes of British Airways parent IAG and Germany’s Lufthansa, whose profits have in the past been buoyed by corporates spending more by booking closer to departure and flying at more convenient times.
Shares in IAG fell 2.6% on Monday after shrugging off warnings of a big 2021 loss to close higher on overall transatlantic travel hopes on Friday..
Some business travellers are desperate to get back over the pond.
“We are in a relationship business and travelling is necessary to meet clients, to win deals,” said Anthony Diamandakis, Citi’s co-global head of Global Asset Managers.
For smaller, non-financial businesses too, travel is essential for trade.
“In my experience of the USA, it’s a people market – deals get done face to face, with a handshake and looking into each other’s eyes,” Tony Kinsella, chief executive of UK-based materials development and testing company Lucideon, said.
The United States is allowing fully-vaccinated Britons and Europeans to enter from Monday, fully re-opening to two-way traffic for the first time since the pandemic started.
“USA, here we come,” said Kinsella, who already has his tickets booked.
LONG SLOG
Most experts believe that corporate travel will lag the recovery in leisure travel.
U.S. spending on corporate travel is expected to reach only 25%–35% of 2019 levels by the fourth quarter of 2021, and 65%–80% a year later, according to a Deloitte survey of 150 travel managers.
One British FTSE 100-listed company, which did not want to be named, said it planned to reduce travel for internal meetings next year by two-thirds on 2019 levels, and by one-third for external meetings.
That means the full transatlantic restart might not be as lucrative as airlines would hope.
Europe-based carriers tend to be more reliant on transatlantic revenues than their U.S. competitors.
Pre-pandemic, those routes accounted for more than 26% of IAG’s revenues and over 24% of Lufthansa’s, according to Bernstein analyst estimates.
That compares with between 11% and 17% of passenger revenues at U.S. carriers American Airlines, United Airlines and Delta Air Lines, and 16% of Air France-KLM’s.
UK-based Virgin Atlantic is even more exposed, with an estimated 60-70% of its revenues coming from transatlantic routes.
Airlines do not break down transatlantic profitability, but one analyst estimates that at IAG for instance, first class, business class and premium economy flying account for more than half of the profits it makes from transatlantic flying.
John Grant of global travel data specialist OAG does not expect transatlantic business travel to start to show any significant recovery until the second quarter of 2022.
“Major conferences in the first quarter of next year have already in many cases been cancelled since the planning cycle is so long,” he said.
“Companies want to be sure that there is revenue to be had from such trips, so they will be waiting to see how economies and trade recover.”
LEISURE UPGRADE
Airlines are going to be looking to leisure travellers to fill the gap left by corporates, and after months of lockdowns their pockets will be deeper, encouraging them to splash out on that premium economy or business class seat.
According to Willie Walsh, IAG’s former chief executive who now heads up global airlines body IATA, the importance of corporate travel to airlines is often overstated.
“Everybody assumes that people travelling in the premium cabins are travelling for business. They’re not,” he told a recent industry event.
Airlines are trying harder than usual to entice leisure customers to upgrade given the dearth of business travellers.
“We’re seeing when people do take that trip, they’re thinking more of the experience,” said Virgin Atlantic’s CEO Shai Weiss.
IAG, Lufthansa and Virgin have spoken of strong demand for premium travel, and said that there are also signs that business travel is returning.
Delta also said last month that its corporate bookings for Europe doubled to 30% of 2019 levels following the reopening announcement.
OAG’s Grant said pent-up demand and seasonal holidays had helped lift fares on transatlantic routes in recent weeks, and the market would likely remain strong until mid-January.
“The absence of business travel will make the airlines wary of adding capacity back too quickly in the first three months of next year,” he said.
(Writing by Sarah Young; Additional reporting by Rajesh Kumar Singh, Andres Gonzalez and Kate Holton; Editing by Jan Harvey, Tim Hepher and Emelia Sithole-Matarise)
Source: One America News Network
