This is another post by Robert Boyle, sponsored by Venari Partners.
So, I’ve dusted off the crystal ball and taken a look, with a special focus on the London market, the largest business travel market in Europe.
Is business travel dead, or just stunned?
The pandemic has hit all air travel markets hard, but business travel has been the hardest hit. In the US, United Airlines reported a 96% reduction in corporate traffic in June. For the week ending August 23, US corporate bookings were still reported to be down over 85%, despite leisure bookings having recovered to “only” a 50 percent reduction.
What are the prospects for recovery? As the old adage goes, predictions are hard, especially about the future. I will therefore start by looking back at where we were before the pandemic and how business travel fared in previous downturns.
Pre-pandemic business travel market
Back in 2019, there were 35.7 million business travel trips through London’s main five airports (Heathrow, Gatwick, Stansted, Luton and London City). The vast majority of those trips were international (87.3%) and of course the dominance of international would be even more striking in revenue terms. Heathrow was the most important airport for business travel, with over 20 million passengers in 2019, 56.9% of the total.
Heathrow’s market share has actually been declining in recent years, having peaked at 67% back in 2013. The largest share gains were made by Gatwick and it will be interesting to see if Heathrow can recapture some of the lost share as airlines consolidate back to their core networks.
Source: CAA, GridPoint analysis
Although Heathrow was by far the biggest in terms of business passenger volumes, business travel focused London City airport had the highest dependency on this market segment. It is tempting to think that the loss of business travel demand will uniquely hit airlines operating from Heathrow and London City, but there was a sizeable slug of business travel at low-cost carrier dominated airports like Stansted and Luton.
Source: CAA, GridPoint analysis
The market was split almost exactly 50/50 between UK resident travellers and those based overseas. There is a much wider spread of airport use amongst the UK residents, whilst 67% of overseas business travel to the UK comes through Heathrow.
Source: CAA, GridPoint analysis
Business travel to and from London has not been much of a growth market for many years. The 2019 figure of 35.7m passengers had still not regained the peak of 38.5m reached in 2007. The Global Financial Crisis saw business travel fall by 20% between 2007 and 2009. Although there was modest growth in the 2014 to 2019 period of 1.2% p.a., the market never fully came back. Leisure and VFR demand grew over the 2006-2019 period by an average of 2.6% p.a, with growth in the last five years higher at 5.0% p.a. As a result, business travel as a percentage of all trips had declined from a peak of 28% in 2007 to only just above 20% last year. Even at a reduced level of 20% of the market measured by passengers, business travel was still incredibly important in revenue terms, with business passengers more often travelling in premium classes and attracting higher yields.
Source: CAA, GridPoint analysis
Short-term corporate travel prospects
According to a survey in mid-August by the Global Business Travel Association (GBTA), most companies expect business travel to resume in the next six months, suggesting that there will be some recovery in demand as we move into 2021. It should be noted that “Not sure” was the second most common answer, highlighting the uncertainty.
Source: GBTA
The above chart shows the figures for all geographies and as the next chart shows, the picture in Europe was somewhat better, with 20% of European companies expecting international business travel to resume in the next 2-3 months. The prospects for a resumption of domestic business travel in the next 2-3 months were even stronger at 70%. However, the fact that only 9% of North American companies expected international business travel to resume in the near term is a bad sign for the transatlantic, the most important long-haul business travel market from London.
Source: GBTA
When considering business travel at the moment, the UK and Spain are the two countries that European companies are most concerned about. That doesn’t bode too well for the inbound London short-haul business travel market in the short term.
Source: GBTA
Long-term prospects
The final interesting set of statistics from the GBTA survey was for company views on the long-term recovery in business travel, once COVID-19 risks disappear. Opinions were split quite evenly between those who thought that travel would recover to pre-pandemic levels within three years and those who saw a permanent reduction.
What does the crystal ball say for the rest of 2020?
Short-haul travel into and out of Heathrow reached 31% of 2019 levels in August, but that will have been dominated by leisure and VFR trips. The September numbers will be more revealing, especially for the second half of the month when business travel normally resumes.
However, with over 80% of companies saying that they would be concerned or very concerned about business travel to the UK and only 20% of European companies saying that they expect international business travel to resume in the next 2-3 months, I can’t see short-haul corporate travel volumes getting far above 10% of normal levels in the short-term. I would expect the less risk-averse small and medium size enterprise and sole trader segments to come back faster than the corporates, so maybe we might get to 20% before Christmas.
Long-haul will be even worse. Total passengers through Heathrow in August were only 8% of 2019 levels. Travel restrictions and quarantine requirements are all but blocking the resumption of long-haul business travel, especially to and from the USA. Only 8% of North American corporates expect to see business travel resume in the next three months. So getting back into double digits before the end of the year seems quite a tall order.
If a testing protocol can be agreed which can start to get the travel restrictions lifted this month, then maybe things can recover a little faster. I do believe that there is pent up demand for business travel since not all business trips are discretionary or able to be replaced by videoconferencing. For example, one market which has remained robust is marine, moving crews around the world is still an essential part of keeping expensive ships moving and earning money.
Where can we expect to get back to by 2023?
Amongst the corporates who replied to the GBTA survey, half of them expect to return to pre-pandemic levels of business travel once the pandemic is behind us. If the other half cut their travel by 50%, that would see business travel return to 75% of 2019 levels over the next three years.
The Global Financial Crisis caused a 20% drop in business travel to and from London, which still hadn’t recovered three years later. The changes in attitudes to business travel, whether from forced mass adoption of videoconferencing, or from growing environmental awareness, seem likely to drive a bigger structural reduction in demand.
So maybe a recovery to 75% is a little optimistic for a mature market like London without a strong underlying growth trend.
What about the medium-term?
What is even harder to predict is how quickly demand will recover from 10-20% levels in the short term to anything approaching 75% in the long-term. Getting approval for and deploying a vaccine is one obvious trigger, but that is likely to be at least 6-12 months away. Finding a way to remove the travel restrictions before then most likely requires the adoption of a testing regime. Recent trends in infection rates have certainly not been encouraging.
In an opinion piece in The Telegraph (link to non-paywalled summary), Alex Cruz, CEO of British Airways said that BA can only survive if the government works with the company to put a testing regime in place which will allow restrictions to be lifted.
For a business travel focused airline, it is easy to understand why.