Europe travel ban could hurt U.S. airlines even more during pandemic

The plans reported by the European Union to ban American travelers would certainly be a disappointment to quarantine-weary globetrotters looking to reenter the world.

The plans are expected to be announced next week and reviewed every two weeks thereafter. For some U.S. airlines, the ban could portend a slower and more painful task as they attempt to recover from their pandemic woes.

With much of the world still in the early stages of reopening closures, the most robust travel activity is taking place in the United States. Despite a resurgence of the virus in parts of the country, this demand in the United States has come from leisure travelers and people seeking to visit friends and relatives after months in quarantine.

For some airlines, this has been easy to capitalize on.

Southwest, for example, is primarily a domestic airline, and its few international destinations are largely in the greater region, such as Central America or Mexico.

Allegiant Air, likewise, flies primarily in the United States. It operates on a point-to-point model, avoiding hubs, allowing it to adapt quickly when demand appears in new locations during the recovery – or when demand drops in certain areas due to spikes in cases.

For the big three – American, Delta and United – the situation is darker.

The airlines all operate large national networks and have adjusted their plans and business models to focus on optimizing them.

However, these airlines still rely heavily on revenues from international flights and often use these national networks to supply international hubs.

“National and international businesses have diverged significantly,” said Vasu Raja, who heads network and route planning for American, in a previous interview with Business Insider. “Although we are increasingly optimistic about the sustainability of the domestic market, the international seems to be a much different proposition.”

“While we are still in the early stages of our planning, we anticipate a much different and much more redesigned international network for American Airlines,” he said.

Based on increased domestic demand, American plans to operate 55% of its domestic capacity in July, compared to the same month in 2019. In April, the airline flew about 20% of its domestic capacity, and in May, she stole about 25%, according to Raja.

However, American expects to fly only 20% of its international capacity and load factors are expected to be low.

While airlines can certainly continue to woo domestic travelers, a real recovery would be impossible without international travel.

One reason is that airlines see their highest margins of all ticket types with premium cabin seats on international flights. Ticket sales in premium cabins such as business class on international flights offer significantly higher returns than economy seats, whether domestic or international.

In addition, upselling and other ancillary costs generate significant revenue for airlines, and more opportunities exist on longer international flights, which are typically flown with larger planes. For example, Delta earned $ 15 billion for premium products and upgrades in 2019, while the Big Three earned nearly $ 3.4 billion in checked baggage fees in 2019, according to the Bureau. of Transportation Statistics.

Business travel is crucial for major airlines. Even though business travelers make up only 15-20% of airline traffic, they account for about half of their income, analysts say.

One of the main reasons is that people traveling on corporate pennies tend to be less price sensitive than leisure travelers. They often buy tickets closer to the date of travel, when fares increase, if a meeting or in-person appearance is essential.

Unlike the relative handful of wealthy leisure travelers and honeymooners who treat themselves to a special treat, most of the business class passengers are business travelers, whose companies are willing to pay for them. more comfortable and better rested after a flight. It is an effort to keep the productivity of workers at a high level.

So far, business travel has not started to make a significant comeback, and is unlikely to do so for some time, according to Andrew Didora, airline analyst at Bank of America, in a recent memo by research.

Business travel has been slow to return to China, which went into lockdown about two months before the United States and is much further along in its recovery.

Additionally, concerns about exposure or liability will likely continue to delay business travel until there is a vaccine for COVID-19. Even a partial return is unlikely before the full reopening of offices, Didora wrote.

To all this, the possibility of additional travel bans, or a tit-for-tat escalation between countries, worries industry insiders.

“Public health is still the number one concern in the world right now,” Tori Emerson Barnes, executive vice president of public affairs and policy at US Travel business group, told Business Insider US in a mailed statement. electronic. “But bans like these tend to escalate into cycles of political retaliation, which is the last thing the global economy needs as we try to start a recovery.”

Representatives from American, Delta and United referred to Airlines for America, a trade and industry lobbying group representing most of the major airlines, for comment.

In a statement, a representative of the trade group stressed that carriers were anxious to return to their normal schedules.

“The US airline industry is eager to resume service to Europe and the world at large,” said Katherine Estep, a representative of the group, in an emailed statement. “We will continue to work with governments around the world to restore service in a way that puts the well-being of our passengers and employees first.”

Experts have predicted that it will take up to five years for airlines to fully regain 2019 flight and demand levels.

Ultimately, airlines that have built their business models around international travel will continue to struggle, even if domestic travel returns.

“While the recovery is good, we are a long way from anything that can sustain the business over the long term,” said Raja, head of network planning at American, in a previous interview.

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