We have reached a fascinating pivot-point for the airline industry as airlines struggle to generate profits as the pandemic continues. The latest development has most major airlines ordering their employees to be vaccinated against COVID-19 to keep their jobs.
The backdrop to this decision was the expected drop in future travelers brought on by an increasing concern over the delta variant. The daily numbers of passengers screened by the Transportation Security Administration (TSA) shows that only 60 percent to 70 percent of the traveling public has returned to the skies. The rate of future reservations is dropping, and the number of future reservations being cancelled is escalating, and that is sending ripples of concern through the airline industry.
Add to this a drop in the number of corporate travelers, and the tone becomes even more serious. Airlines generate 70 percent of their revenue from business travelers, and fewer are flying than prior to the pandemic. With more companies allowing remote work for employees, the need for face-to-face meetings has decreased. The severe decrease in revenue has forced airlines to remove the valuable business/first class seats and replace them with economy plus seats.
Since most of the demand is from leisure travelers, airlines are seeing more of a demand for the larger economy seats, which can be sold for 33 percent more per square foot than basic economy seats. As such, the airlines are trying to capitalize on what demand there is for travel.
As if this were not enough, airlines are also facing a historic drop in the number of employees they can hire. Never before have airlines seen a time when so few are applying for work. Things are so bad that a recent American Airlines flight arrived at a destination and passengers were unable to deplane — because no American Airlines employees were on duty at the time.
With all of this in mind, airlines are requiring that their employees be vaccinated against COVID. Starting with United Airlines in early August, other airlines have followed along, telling their employees that they need to be vaccinated to keep their job; most employees are complying.
Interestingly, smaller, regional carriers have yet to follow this lead, in part because they have a more difficult time finding and retaining employees than the larger legacy carriers. The fear among many regional carriers is that such a requirement would further decrease the number of prospective employees.
Airlines are clearly positioning themselves for the expected upcoming announcement from the Biden administration that proof of a COVID vaccination is required for domestic travel within the United States, or a negative test result within 72 hours of departure. This has been the U.S. policy for international travel since earlier this year.
In February, the Biden administration came close to ordering proof of a negative COVID test for domestic travel, but the airline industry pushed back. With the approaching summer travel season and the number of advanced reservations, the fear was that any such measure could have repressed some of the future travel numbers at a time when airlines were desperate for revenue of any kind. But that position has clearly changed. Airline CEOs are publicly stating that they will be ready if such a mandate is imposed.
So why have airlines changed their position on vaccine mandates? As always, it comes down to revenue and a desperate hope that the next step will bring back more passengers. Airlines are losing money. They can increase the leisure fares only so much; even still, it won’t fill the void left by the absence of corporate travelers. The hope is that if a vaccine travel mandate is put into place for domestic travel, the number of people headed for the airports will increase.
But will it?
This latest move could backfire on the industry, causing fewer people to fly, but airlines are willing to take that chance because so far nothing else has worked. The yield or profit per-ticket on leisure travel is surprisingly low, in some cases less than $20 per ticket each way, so airlines are scrambling to find ways to increase their revenue stream. This latest approach may succeed or backfire — only time will tell.
The one thing we know for certain is that the airline industry as we know it is changing forever. And there is a good chance that when the music stops, we will see fewer airlines in existence.
Jay Ratliff spent over 20 years in management with Northwest/Republic Airlines, including as aviation general manager. He is an IHeart aviation analyst.