Airlines receive only about 60% of their revenue from passengers directly (the other 40% comes from selling frequent-flier miles to credit card companies and other travel partners like hotels and car rental agencies). But of that 60% of passenger consumer revenue, the big money comes from business travelers – as opposed to those flying for leisure or personal reasons – in percentages that far outweigh their numbers. Business travelers account for 12% percent of airlines’ passengers, but they are typically twice as profitable. In fact, on some flights, business passengers represent 75% of an airline’s revenues1. This phenomenon has obviously changed in light of the pandemic, as overall airline traffic has been decimated in Q2 and Q3 2020 and was at one time down 96% (in April 2020) compared with the same period in 2019, though it has “recovered” to only being down about 70% as of the first week of October 2020 vs. the same week in 20192 . With the proliferation of Zoom meetings and most corporate employees working remotely, business travel in particular has been sharply curtailed in 2020.
Still, business and consumer credit card customers are continuing to add to airline profits in the form of racking up miles and points with everyday spending even if they’re not currently redeeming for free travel in the current environment.
Corporate Comforts
Corporate travel policies used to emphasize saving money. However, (pre-pandemic, anyway), given the hassle-prone nature of air travel, managers often showed concern about employee comfort, convenience, and productivity – as it was counter-productive if an employee arrived too tired or stressed-out to do his or her job. So, businesses were often willing to pay more to book last-minute flights or non-stops options, though typically not seats in an elite section of the aircraft.
For senior executives or employees that are subject to special corporate travel policy consideration, first-class and business-class tickets can cost as much as 10 times the price of coach tickets. This premium pricing typically brings passengers better service and higher quality amenities than economy-ticket offerings. Business and premium consumer spending on these goods and services encourages competition among airlines for the most lucrative passengers. Many airlines, to lure new passengers, introduce innovative services or refit aircraft for more first-class legroom.
Business travelers and high-end travelers also bring substantial revenue to airlines by purchasing additional services and using frequent-flier and other incentive programs.
key takeaways
- Business travelers account for 12% percent of airlines’ passengers, but they are typically twice as lucrative – accounting for as much as 75% of profits.
- Businesses are generally willing to pay more to book last-minute and non-stop flight options but rarely allow premium-section seats for rank and file employees.
- Businesses usually allow employees to leverage business travel to earn and keep frequent flyer miles and points, which are increasingly valuable to airlines as a source of revenue and data.
Business Travel Focus
As a result, many airlines are now focusing attention on corporate trade. For example, since 2017, Southwest Airlines – once known for its low frills and low fares – has targeted business travel, with an in-house department that has grown from 30 to 80 people; working with companies’ travel managers, the team can offer discounted fares or match a passenger’s status with other frequent flier programs. Southwest also used input from companies’ travel personnel in its decision to start offering nonstop flights out of the Cincinnati airport in 2017.
Frequent Flier Programs
Frequent-flier mileage programs are increasingly valuable to airlines, as business travelers and other first-class passengers link their credit cards to the programs and allow their consumption and spending behaviors to be tracked. High-income consumers have significant levels of disposable income to spend on a broad range of goods and services. Many businesses gather or purchase consumer spending data for use in developing a marketing strategy and product research and development.
The data airlines gather on high-end consumers using frequent-flier miles programs is extensive and tremendously profitable: Some frequent-flier programs are now worth many times the value of the airlines that own them, in fact. For most airlines, these incentive programs are an essential source of revenue and profitability that allow them to offer better pricing on tickets and more routes. Many companies benefit from this data and are willing to pay for programs that are inexpensive for the airline to operate. Not all miles or travel points earned by consumers are actually used due to lack of travel redemption or expiration (which is termed “breakage”), further lowering program costs and profit contribution.
ARTICLE SOURCES
- According to a Trondent Development Corporation study sourced October 7, 2020. https://www.trondent.com/business-travel-statistics/#:~:text=Business%20passengers%20represent%2075%20percent,of%20profit%20for%20increased%20sales.
- According to the TSA sourced on October 7, 2020. https://www.tsa.gov/coronavirus/passenger-throughput