While the pent-up demand from domestic leisure travelers has enlivened the airline sector, the post-pandemic shape of business travel is not entirely clear.
Airline and airport executives as well as hoteliers and the cities who depend on hotel bed taxes wonder if they are contemplating a new paradigm or playing a waiting game.
Some airlines are reporting that as much as 40% of domestic business travel
“The airlines have been downplaying the loss of business travel,” said Philip Baggaley, a managing director at S&P Global Ratings, and sector lead for U.S. Transportation, Aerospace and Defense, corporate ratings. “To some extent, it’s a function of ‘we just don’t know what it is going to look like.’ We are still part-ways through this process.”
And it's far from a complete doom-and-gloom scenario for passenger air. S&P in November revised its airport sector view to positive citing improving aviation industry conditions.
For the month through Wednesday, the Transportation Security Administration's
But U.S. hotel business travel revenue is projected to be 23% below pre-pandemic levels in 2022, ending the year down more than $20 billion compared to 2019, according to a report released Tuesday by the American Hotel & Lodging Association and Kalibri Labs. This comes after hotels lost an estimated $108 billion in business and travel revenue during 2020 and 2021 combined, the report said.
A lot is at stake for facilities like Los Angeles International Airport, which has a $15 billion capital improvements program underway.
Los Angeles World Airports Chief Financial Officer Tatiana Starostina declined to comment for the story through spokesman Heath Montgomery, who pointed to offering documents for a February bond sale for his response.
The outlook from WJ Advisors, the consultant hired by the airport to determine whether revenues from an airport car rental facility could cover bond payments, bases its assumptions for enplanement recovery on the idea that business travel will return to previous levels.
The airport priced $1.5 billion in new money and refunding bonds in three different sales from January through March. Bond documents from the last sale include the report from WJ Advisors that notes the airport’s forecasts for enplaned passengers assume that the LA “combined statistical area would remain a major destination for U.S. leisure and business travelers.”
LAX anticipates that domestic enplanements will recover to fiscal 2019 levels by 2024 and international by 2025, according to the bond documents.
The offering documents also quoted a worldwide survey of CFOs saying that 52% of those surveyed expect company travel expenditures to reach 2019 levels in 2022 — and that domestic business travel spending will fully recover to 2019 levels in 2024. It also says in the bond documents that "the use of video technology during and after the COVID-19 pandemic for business purposes will continue, but will not have a material effect on business travel."
The airlines, however, are now acknowledging there could be some loss, but they are trying to offset that with premium leisure, which is relatively strong right now, Baggaley said.
“The airlines are reporting that more passengers are willing to buy some extras,” Baggaley said. “You can see the effect of this in airlines trying to reconfigure seats.”
Economy class now includes basic economy, regular economy and premium economy with more leg room, Baggaley said, adding that on international flights there is even more differentiation.
“There are some macro affects working in their favor, like there is a lot of pent-up demand for leisure travel,” he said. “There is somewhat a sense of I am going to travel and treat myself, because I have been missing it all this time.”
Even so, for the big network carriers, like American, Delta and United, business travel is a more profitable business, he said.
Business travelers are more lucrative because “they aren’t looking for the cheapest fare, so you can charge more; and they are often traveling last minute, so they pay more," said Howard Cure, director of municipal bond research for Evercore Wealth Management.
The loss of business travel is more of an issue for the airlines than the airports, Cure said, but he added that applies on a case-by-case basis.
Airports that are larger, or in cities that are tourist destinations, are likely to fare better while it all shakes out, he said.
Conversely, San Jose Airport International, in the heart of California’s famed Silicon Valley, sees a higher volume of business travel, than leisure travel, Cure said. It also competes with San Francisco International Airport and Oakland International Airport, both of which are more likely to draw tourists, he said.
In February, 307,605 passengers boarded planes in San Jose, down more than 40% from pre-pandemic February 2019.
S&P stuck with its positive airport sector outlook even when Omicron struck slowing a return to travel, said Kurt Forsgren, an S&P managing director in U.S. Transportation Infrastructure and U.S. Public Finance.
“Most airport business is volume-metric based,” Forsgren said. “They don’t care who is on the plane as long as they are passing through the airport. But they do prefer to have business travelers, who are on expense accounts and are willing to pay for high-end parking. It would also erode revenues for airports looking to fill hotels they own [if business travel doesn’t recover to previous levels].”
The agreements that airports have with airlines and the negotiations on terminal concession and space is not something that would be immediately impacted by a change in travel, Forsgren said.
Contracts between airports and airlines tend to stretch out several years. For instance, most of the contracts that San Diego International Airport has are 10-year contracts, according to a spokeswoman.
San Diego International Airport Authority hasn’t experienced any pressure from airlines to renegotiate its airline operating lease agreements recently, or even in 2020 at the height of the pandemic, said Sabrina LoPiccolo, an airport spokeswoman.
“The Airport Authority has two types of AOLA: a signatory, which has a 10-year term, and a non-signatory, which can be terminated with a 30-day notice,” LoPiccolo said. “Each airline signs an agreement with the Airport Authority, and the majority of the airlines signed the Signatory AOLA.”
Airports are also affected by the loss of international travel, which has not returned to pre-pandemic levels, combined with pressures from soaring fuel costs and a pilot shortage that is driving airlines to
Whether challenges for airlines become problems for an airport, Cure said, partly depends on how dominant an airline is at an airport.
Airports like Las Vegas and Orlando are not dominated by a single air carrier, so they are more protected, Cure said.
Baggeley doesn’t think the world will return to how it was pre-pandemic.
“Even if one imagines we don’t have a war on another continent or a health situation, there is no indication that travel will return to the way it was in the past,” Baggaley said. “Supply chains are pulled back all over the world. That will have some effect on business travel, because trips to visit suppliers is an aspect of business travel likely to return. When it does return, it may be trips to Guadalajara, [Mexico] instead of Shanghai, [China].”
