Five Early Thoughts on What Airline Demand Recovery Looks Like

The novel coronavirus COVID-19 has brought enormous change to the world and lingering uncertainty. Among these is when people will be comfortable flying again. Concerns about social distancing, air quality, and more is keeping current flights with very few passengers, and correspondingly airlines have cut massive amounts of capacity in response. Recent government aid offers from the CARES Act to the airline industry focuses on protecting workers through the end of the summer. But what happens after this?

Most travel meets one of three categories of intent: business, leisure, and VFR, or visiting friend and relatives. A sometimes more insightful way to look at this is in two groups: those who pay for tickets themselves, and those for whom their company foots the bill. I believe that thinking about travel post this crisis needs to think about how these groups may be affected in the longer term. While it is very early to make such predictions, I'll offer the following as likely longer term implications of the current crisis:

1. Leisure and VFR travel will rebound fully and with strength. Being sheltered in place is likely to generate a great necessity to get out and go somewhere when things are considered safe again. I'm not willing to estimate when this will happen, but I am confident that it will. It has during earlier demand-destructing events, and the cloistering needed to contain the virus will have at least an equal and opposite reaction.
2. Some business travel will fully rebound also. Sales people aren't as persuasive on the phone or through video. You can't effectively audit or examine a plant or factory with cameras and technology only. There are many other types of business related travel that are likely to be deemed essential to the businesses that pay for this travel, and this travel may come back sooner than leisure travel once it is considered safe and acceptable again.
3. Some business may not return for a long time, or even forever. A lot of business today is being done using Zoom, Skype, or other video and audio conferencing tools. While today this is a compromise to get things done while doing our part to not spread the virus, it's also teaching us that many things are quite effective this way. Some business travel, and I would estimate this to be 5%-15% of all pre-virus business traffic, is at risk of not being justified by companies as travel spend in the future. That's because they will realize they can save this money and still get the same business done by using technology. Does every board meeting need to be in person, or could one per year be done by video by choice?
4. The "return" of air travel has two waves, not one. Some have speculated as to when air travel demand will return, but thinking of this more carefully suggests that there are actually two waves that have to be completed. There is certainly a date in the future when the airline industry will carry at least as many people as they did before COVID-19. But on this date, whenever it happens, likely the price the industry is able to charge for that demand will not be at the prices charged earlier. This is because to get the demand back, the industry will need to heavily promote to fill capacity as it is added back into the system, and some customers will be reticent to fly until they feel the deal is good enough and they are safe enough. So, after the volume is back, a second wave of getting the price, or rate, back will be necessary and this may take months or multiple quarters longer than just the butts in seats.
5. Biological safety will have some permanence, along with operational safety. Airlines have done an excellent job of making safety a priority. Formal programs like the FAA-sponsored Safety Management System (SMS) along with technological advances in airplane design and systems have made serious safety incidents rare. The 737-Max challenges prove this point rather than refute it, as it stood out as such an outlier in an otherwise very safe environment. But the industry has not done much to think about biological safety. How sanitized and disinfected are the airports and airplanes, do customers really know how air circulates in the plane versus in a restaurant, and are airline employees trained to respond accurately to customers with new concerns as a result of this virus? I believe that the "safety umbrella" at airlines will expand to include some of these ideas, and be measured and monitored in the ways that operational safety is today.

What does this mean for airlines? Because of the ideas above, I believe that airlines who sell lower fares on average have a distinct advantage over those that rely heavily on high-paying business demand. This is because that second wave of "rate coming back" isn't as important for this group, and the risk of losing some amount of business travel forever is less of a revenue risk to these airlines. Correspondingly, airlines that rely heavily on businesses that pay for their employees tickets will have to deal with the loss of some traffic and longer recovery time for price stability after the volume returns.

What's missing from all of this is a sense of timing, and that is because it's harder to say when something will happen than if it will happen at all. I am confident that the effects I outlined above will all take place, although I can't say with any confidence whether this kind of recovery happens in the third quarter of 2020 or not until 2021. I am certain, however, that it will!