U.S. Airlines Face Another Business Travel Threat: Private Aviation

Arhaq

The pandemic has changed the way companies think and do business. More people are likely to be working from home, using technology for meetings is more commonplace and comfortable (if somewhat sterile), and views of how some things can get done at lower cost are now clear. Because of this, there has been at least one study estimating that business travel will reduce by up to 36% and Bill Gates has estimated it will drop 50%. As the large U.S. Airlines look to get their daily cash burn to neutral and are seeing signs of optimism for summer leisure travel, the future of business travel is still highly uncertain and otherwise things should be looking up, right?

Not exactly, if the airlines are dependent on business travel. This is because while some are not likely to fly as regularly, others are fine to get on a plane. It’s just that the plane they board will be a private jet, instead of a commercial flight.

While commercial flights are still running generally light loads and airlines are reorienting flights to more leisure destinations, private flights have been literally taking off since the pandemic started. According to some in the industry, a rule of thumb used to be that it took about $10M in net worth to be a regular customer of this kind of travel, and significantly more if you wanted to own your own plane. Also, flights were largely business related and equipment utilization was relatively low as they would fly when the flight was needed, and wait for next use.

Since the pandemic, however, two key trends have emerged. One is that many more leisure trips are being taken on private jets, and this has increased equipment utilization. The industry has found success in moving the flight times of some customers, in exchange for a lower rate per hour, to fill in gaps that were otherwise underutilized. This has helped the companies who fly the planes, and those that service them on the ground, like Signature Aviation. That ground operator has seen a surge in business since the pandemic.

The second trend is that people with lower net worth are increasingly using this way to travel. The industry is now actively courting those with $2M to $3M net worth, 70% lower than the previous perceived threshold. Long gone are the days when to fly privately you had to own the plane or own a fractional interest in one. A big innovation has been the sale of pre-paid cards that offer just a few hours up to 10 or more hours of flying. This has brought more people into this market. There are travelers who are now trying private aviation because of ease of operations, significantly shorter airport processing times, overall fewer crowds and no tight seating on the plane. Once hooked, they realize that they can afford this more often and are using their cards to take leisure trips as well as business trips.

Having $3M net worth still puts someone in the stratosphere of economic wealth. Yet who was paying for and sitting in the business and first class cabins of commercial flights? The new passengers that the private industry is attracting are not new to flying, they are just new to flying in this way. Every trip taken this way means fewer expensive seats sold by commercial airlines. This is not like losing a leisure customer who opts for a local theme park instead of flying. This is losing one of the highest-paying and highly profitable customers an airline can find. Losing one of these customers is economically equivalent to losing two to four, or even more, leisure customers, and significantly harder to replace also. It only takes a small percentage of business travelers to change to private flying to have a meaningful effect on airlines that depend on this kind of traffic.

Once again this trend favors low-cost airlines who aren’t likely to lose their price-sensitive travelers to a private jet. U.S. Airlines like Delta, United, and American have the biggest investment in premium space on their aircraft, and rely on travelers for those seats to pay fares many times as much as those sitting in coach. These airlines are already bracing for the loss of some of this traffic due to just fewer business flights post-pandemic. It’s not that private aviation wasn’t there before the pandemic, but now that it is reaching into lower income brackets (among the very high brackets, that is) it is taking share by attracting the same customers that these commercial airlines need to justify their investment.

It isn’t clear whether this trend will reverse itself once the pandemic is over. But just like Zoom, the more people who try private aviation, the more comfortable they will be with it and realize that it is reliable and effective. It is not for everyone and still requires significantly higher rates for even short trips. The private aviation industry recognizes this, and by increasing utilization of their fleets and offering lower-price-point ways to try the product, they are working to win this business not just for now, but for the long haul.

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