BUSINESS TRAVEL is as old as the traders who carted silks and spices between ancient civilisations. The executive tapping at a laptop as other flyers recline their seats and settle down with a glass of wine is a more recent phenomenon. The physical movement of goods on ships and planes and the supply chains that underpin global manufacturing and services firms rely on an army of businessfolk flying around the planet. But that army is in retreat.
Executives, diplomats and government employees, and ngo staff still trot the globe. Bosses of big companies often spend more time in corporate jets than with their families. At lower altitude workers travel to fit out factories, attend trade shows and conferences, launch new products or meet clients. Business class is a recent arrival. Airlines pitched it between first and economy class only in the late 1970s. Such travel has grown a lot in the past 25 years. According to Bernstein, an equity-research firm, total spending on international and domestic travel in 1995 amounted to $2.1trn, of which $400bn was for business. By 2019 around a quarter of the total, or $1.3trn, was spent on business travel.
Covid-19 has hit corporate jaunts hard. A poll in January by the Global Business Travel Association found that 79% of its members had cancelled all or most business travel. Credit Suisse reckons 2021 will see 65% fewer international business trips than in 2019. Bill Gates thinks the shift will be permanent. “My prediction would be that over 50% of business travel…will go away,” he says. That may be too pessimistic. The boss of one aviation firm sees a full return. Bernstein goes for up to 24% never coming back. Credit Suisse reckons 10-20% will disappear for good. Citi, another bank, plumps for 25%. Any recovery will be long in coming. McKinsey, a consultancy, points out that business travel rebounded more slowly than leisure travel after earlier disruptions, noting that after the financial crisis the number of international business trips from America fell by 13% (against 7% for leisure travel) and took five years to recover, compared with two years for tourism.
Every knock that travel has taken in recent decades has been followed by similar predictions of permanent decline. Each time it has failed to materialise. Why is this time different? Vaccines, fast-testing regimes and the dropping of travel bans might yet open the door for leisure travel. But Zoom, Google hangouts, Skype and other video-conferencing services have a better chance of permanently replacing business-class tickets, for several reasons. One is that companies badly hit by covid-19 will be under pressure to cut costs—and travel is an easy target. Second, a blizzard of pledges to cut carbon emissions and hit climate-change targets make cutting flying “low-hanging fruit”, says Paul Flatters of the Trajectory Partnership, a consultancy. Third, even though vaccines may reopen borders to many travellers, so long as covid-19 is at large firms will be reluctant to sanction trips not strictly required.
Some types of business trip are harder to conduct over a screen and so likely to revive. Vik Krishnan of McKinsey notes that these include sales and client meetings. Personal contact, especially when seeking new business, is hard to replicate digitally. And once one company resumes meetings in person, so will its competitors. Manufacturers will struggle to monitor remotely factories in far-flung corners of their supply chains. Trade shows and conferences that bring many people together in close proximity are more vulnerable, notes Bernstein. Hybrid shows, with some people present and others joining online may attract a larger audience who might otherwise have neither the time nor the excuse to attend, says Caroline Bremner of Euromonitor, a data firm. Plenty of low-level internal meetings will migrate permanently to the online world. One executive who has not flown in months happily notes that the sort of trip that required flying halfway around the world for one short meeting will go for good. Though the number of trips is likely to fall, their length may increase as executives try to fit in more, perhaps visiting several outposts in one country in a single trip.
If around a fifth of business travel never returns, that will have big consequences for airlines. Most accommodate some business travellers. Legacy airlines, which rely disproportionately on long-haul business customers, will suffer the most. But even low-cost carriers, which have targeted business travellers in recent years with flexible tickets at higher fares, will feel the pinch. Some 17m of easyJet’s 96m passengers in 2019 were flying on business, almost a fifth of the total and up from 10m in 2012. Southwest is even more reliant, with two-fifths of passengers paying business fares. But the mark-up over economy fares is generally lower than a legacy carrier’s price premium of three- to six-times as much as economy.
For the likes of iag, Lufthansa and Air France-klm, around 25-30% of revenues come from passengers flopping into business-class seats. A rule of thumb for legacy airlines is that business class comprises 10% of tickets, but 40% of revenues and up to 80% of profits. Citi reckons that every 1% fall in business custom knocks 10% off profits. Some airlines are trying to change how they operate. ba, which is part of iag, is trying to sell business-class seats to leisure travellers, but it can never charge as much as to a late-booking executive. The secular decline in business travel will mean a smaller business cabin—and higher long-haul economy fares.
The likelihood that lucrative business travel will rebound more slowly than leisure is a blow to airlines that depend disproportionately on companies picking up the tab. A permanent decline will make life harder still. Yet for the executive who has had to spend weeks of every year on the road the chance to leave the wheelie-bag in the cupboard more often and settle down in front of a computer screen instead may come as something of a relief.
By The Economist
