Until business travelers return, every airline is a low-cost carrier

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• The worldwide share of seats flying on low-cost airlines has been on a steady ascent over the last two decades.
• The COVID-19 pandemic is a massively accelerating event that will further cement the low-cost carrier model as one that will guide the industry and force traditional legacy airlines on a different course.
• Absent business travelers, airlines — many saddled with enormous debt — will struggle to cover their costs, repay debt and adapt to lower yields while chasing price-sensitive leisure passengers.

Aviation limped out of 2020, bidding good riddance to the year that was. Then, it stepped into the reality of 2021. The optimism of a terrible departing year gone by has given way to an industry’s pensiveness about a future without a clear business case.

For airlines whose networks were previously designed to take high-paying business customers to important meetings frequently and consistently, it will once again be a further shift to an almost antithetical customer: the infrequent vacationer on a budget.

Business travel will take years to recover. Leisure passengers, however, have already begun to show their desire to return to the skies. What is sure to follow is another upset of the global air travel industry as it realigns itself with the new demographics of those willing to travel.

Related: Airlines survived 2020, but as flyers return their dollars won’t

This dramatic traffic shift weighs heavily in favor of low-cost carriers, particularly in 2021. While relative strength in their core market is mostly positive for LCCs, the utter lack of business traffic for traditional legacy carriers could upset the balance. LCCs truly will dominate the coming years, less because current LCCs will prevail, but rather that all airlines will need to become versions of LCCs to survive the short term. Until business travel returns, every airline is an LCC.

The result will be an industry that carries more traffic than before – only with significantly less revenue. Such a diminution of high-yield traffic combined with volume growth is like what happened to express cargo carriers such as FedEx and UPS after the advent of the fax machine. It is also what the U.S. passenger airline industry witnessed after 9/11: more low-cost competition leading to lower fares and higher volumes. Now that airlines, once again, are faced with an existential drop in passenger demand, the other side of which undoubtedly arrives without the fare premiums enjoyed for years, this TAC Analysis takes a look at what is likely in store through 2021 and the coming years.

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