5 charts show why a COVID-19 vaccine won't save major airlines anytime soon

  • Air travel demand remains significantly down over 2019 levels, despite a Thanksgiving uptick.
  • But one of the most important sources of revenue for airlines — international business class tickets — has all but collapsed as travel restrictions and outbreaks continue to block most overseas travel, with most companies avoiding nonessential trips.
  • Financial data from the three major US airlines lays bare how badly affected the inability to sell international business class seats has hurt the industry.
  • Even the distribution of a COVID-19 vaccine is unlikely to revive business travel in the near term, meaning airlines like Delta, American, and United may continue to struggle.
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The global collapse of air travel demand in 2020 has devastated the world's airlines. But the loss of one particular type of ticket has been especially ruinous for America's biggest carriers — and will likely continue to wreak havoc even after a COVID-19 vaccine has been widely distributed. 

Although business class seats make up a fraction of the tickets sold on a flight, those fares make up an outsize part of revenues on most international long-haul in any given year. But with international business and leisure travel more or less halted by border closures and travel restrictions as the pandemic continues to spread, sales of those premium tickets have been among the hardest hit.

Before the pandemic, as much as 85% of customers on the big three US airlines' — American, Delta, and United — flew once a year or less, but only generated half of their revenue, according to analysts at Cowen. The remaining 15% of passengers — many of whom are elite road warrior business travelers — made up the other half. Across the industry, 30% of US airline passengers are business travelers, trade and lobbying group Airlines for America estimates that, but they make up 50% of airline revenue.

Now the vast majority of those premium passengers stuck in their home offices, and airlines are feeling the pain. 

Delta's financials lay bare the extent of the problem. Passenger revenues made up 90% of its revenues in 2019, with the rest coming from carrying cargo and from other sources such as investments and other aspects of the airline's loyalty program. 

On its long-haul aircraft, business class makes up 10 to 15% of the seats. Premium economy accounts for another 10% or so. But those categories, which Delta lumps together in its reporting, produced more than 35% of the airline's passenger revenue in 2019. Regular economy class, making up three-quarters of fares sold, produced 50%. (The remainder came from ancillary services like checked bag fees, and the airline's loyalty program.) 

 

That setup worked great in 2019, when lots of people went lots of places to do lots of business. In 2020, Delta paid a heavy price for that reliance on business travel. 

In the third quarter of this year, the airline's business class and premium ticket revenue was down more than 85% over the same period in 2019. With travel down overall and pricing power significantly reduced, passenger revenue was down 83% over that period, with total revenue down 75% as Delta and its brethren have sought to capitalize on increasing cargo demand wherever possible.

The other US mainline legacy airlines — American Airlines and United Airlines — do not disclose how much of their passenger revenue comes from premium ticket sales.

However, one key metric makes clear they're feeling the same kind of pain. That would be passenger revenue per available seat mile. Better known as PRASM, it measures how much money an airline is making from every seat on a given flight. 

It's especially helpful for gauging an airline's financial health because it's not strictly tied to revenue. Say an airline sees its overall revenue fall because fewer people are flying. If it can control capacity — meaning it cuts flights to match demand — and still command decent prices, PRASM should hold steady. Basically, it shows pricing efficiency: The higher it is, the more the airline is making from its capacity.

Over the first nine months of 2020, airline revenues at Delta, American, and United — the three major US global carriers — have dropped 65-70% compared to 2019. And that's including the first quarter, which was mostly normal — the pandemic didn't trigger lockdowns in Europe and the US until March. No surprise there. 

Now look at PRASM — the metric that shouldn't be so strongly linked to revenue. Although airlines quickly grounded planes, suspended routes, and canceled flights to slash capacity and limit cash burn when demand tanked, PRASM has declined roughly 27-30% for all three airlines this year. 

A number of factors could explain that drop, including airlines not cutting schedules quickly enough, and in the case of Delta, blocking middle seats to allow social distancing. The scarier number comes from looking at the third quarter, when the decline was around 50%. 

 

By this point, months into the pandemic, airlines were doing a much better job of matching capacity to demand. Plus, American and United weren't limiting per-seat revenue by blocking middle seats.

So you've got to look at the dearth of business class ticket sales as the culprit for the dizzying drop. That hits PRASM especially hard because international business class tickets, on average, are five times more profitable for airlines than coach tickets, according to Henry Harteveldt, a travel industry analyst at Atmosphere Research.

Neither Delta nor United responded to requests for comment. American declined to share additional details on what percentage of passenger revenue is made up by business class sales.

The meager amount of travel demand that has returned has been largely driven by domestic leisure travelers and those visiting friends and relatives — notoriously price conscious. Business travelers, many of whom disregard ticket prices because their employers or clients are paying, have been largely grounded. Eight-five percent of respondents in a recent poll said that they had cancelled all or most business trips this year.

Even if a COVID-19 vaccine can be approved and widely distributed around the US by the end of 2021, it is unclear whether all international travel restrictions will be fully lifted, or whether business travel will begin to make a meaningful recovery. 

Southwest CEO Gary Kelly said in late-October that he does not expect business travel to return to pre-pandemic levels for about a decade. United executives are shifting the airline's focus to leisure travelers for the near-term.

With airlines and analysts continuing to forecast that US and global carriers will not see a return to 2019 levels of demand until 2024, and business travel expected to lag behind leisure travel in recovering, it appears that airlines will continue to feel the pain of the international business class collapse for the foreseeable future.

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