Commercial Aviation in Transition
Many industries have undergone material changes due to the severity, length, and impact of the pandemic. The effect on travel and commercial aviation has been especially dramatic.
At CDI Global, we believe the pandemic will permanently change the traveling behaviors of some people. The fear of infection will not disappear once COVID-19 is under control. People are now wearing masks and gloves, riding alone in cars with the windows up, and wearing masks outdoors in parks even though the closest person is 100 feet away. The general public’s fear of this virus will be slow to change.
We believe an increased awareness of germs and their spread has been created and will remain after the pandemic has ended. This awareness will push some to continue to actively protect themselves from infection by reducing or avoiding situations where the risks are elevated. This fundamental change in behavior will continue to impact many businesses - especially within the travel industry.
We see the experience of the pandemic causing two permanent changes to commercial aviation – a significant and likely permanent reduction in business travel and a preference for non-stop flights on less crowded aircraft.
Some Business Travel Will Not Return
While domestic (U.S.) leisure travel has recovered to almost 50% of pre-pandemic levels, business travel remains at just 15% of historical levels. Although there are challenges, business is still getting done without much travel thanks in part to the forced adoption of technology. The pandemic has demonstrated all prior business travel may not be necessary. The value of in-person meetings is certainly still necessary and will bring back most business travel. It is the frequency of those trips that will change. Some of the new considerations for business travel are:
- Would visiting a customer twice a year and adding a couple video or voice calls work just as well as three in-person visits a year?
- Is it worth spending the day and incurring the cost of traveling just to attend a short meeting at the home office?
- Could we accomplish everything we need for a business trip remotely without spending time, incurring expenses, and incurring the health risks of travel?
The necessity of each trip will now be more carefully thought through. The answers to these questions will reduce business travel.
A recent study from Ideaworks categorized business travel by “purpose” in detail and predicted how much would return post pandemic. Interestingly, they found only about a third of business travel is related to securing or supporting sales. The other two largest categories – intra-company meetings and conventions each represented 20% of business travel. The study concluded that between 19% and 36% of business travel would not return after the pandemic. Not surprising, more video calls will reduce the number of trips. They concluded in person visits will continue, but the frequency of visits will fall.
While historically, business travelers fill only about 30% of seats, the higher fares they pay total almost 50% of total fares. For the big three airlines carrying an even higher percentage of frequent business travelers - United, American and Delta – this reduction in travel will be material.
Growing Preference for Smaller
The second long-term change will be a growing preference for “smaller is safer” across the whole travel experience. Interacting with fewer people reduces the chance of exposure to contagious viruses. Hotel companies are now promoting their boutique hotels versus large landmark properties. Demand for secluded destinations is growing and crowded locations are being avoided.
For commercial aviation, we see a higher demand for a safe environment, demonstrated through a growing preference for:
- Flying point-to-point, even at less convenient times versus connecting.
- Choosing carriers with smaller aircraft for the perception of fewer passengers to encounter while onboard.
- Travel to small or mid-sized airports near large cities to avoid the larger, more crowded major airports.
Allegiant, Spirit and Southwest, to a certain extent, have already embraced this smaller market model - growing by finding underserved or overpriced markets. Newcomers JSX, Breeze and Xtra Airways will accelerate this trend. New aircraft, including the fuel efficient and quieter Airbus A220 are well-suited for this type of service. To reduce the risk of infection and save on costs, we also believe some business travelers will migrate to these low-cost carriers when travel is required not only to save costs, but to provide a safer travel experience.
The severity of the pandemic has already accelerated service improvements at smaller airports to ready them for more passenger and airline traffic. Over time, driven by a desire for safety and cost efficiency, we believe there will be more domestic point-to-point service along with a reduction in flights requiring connecting at a major hub.
Across all industries, change creates opportunities. For airlines, anticipating the shift in demand and executing that plan is critical. Low-cost carriers already hold a significant operating cost advantage over legacy carriers. Fewer business travelers and increasing demand for point-to-point service will place an enormous amount of pressure on American, United and Delta. The legacy carriers should re-consider their business models that rely heavily on hub connections and operating older, less efficient aircraft.
At small and general aviation airports, we see several business opportunities to support the growing commercial traffic:
- Building new and upgrading old passenger terminal facilities
- Additional flight services provided by third party FBO’s (Fixed Base Operators) or independent ground handlers - including security, above and below wing services, aircraft repair and fueling to name a few.
- Providing GSE (Ground Support Equipment) to service the commercial flights
Servicing commercial flights at general aviation airports may emerge as a specialty service performed by a new entrant or by established FBO’s expanding into the commercial market.
Another dynamic of disruption and change is industry consolidation. US airlines have already consolidated, with start-ups now entering to challenge the large legacy carriers. There has not been, however, as much consolidation with the providers of services and equipment to support aviation. Many of these companies, having experienced significant revenue reductions in the pandemic, are now financially challenged. We believe that we will see several significant consolidations of flight support businesses in 2021 in an effort to gain operating efficiencies through scale.
The pandemic’s disruption of air travel has been substantial and will be lasting. Those companies that make the most of the disruption by anticipating change, acting, and adapting have the opportunity for substantial growth.
Senior Partner and Co-Leader Aerospace & Defense