The chicken or the egg? Air capacity may be returning, but fewer frequencies is becoming a common thread of the recovery that will concern corporate travellers

8 June, 2020

Everybody has their own opinion on the popular 'Chicken-and-egg' metaphoric adjective which describes situations where it is not clear which of two events should be considered the cause and which should be considered the effect. The same could be said right now about air capacity and corporate demand.

It is classic question that represents an ancient folk paradox addressing the problem of origins and first cause and infinite regress, By why is it particularly significant right now when it appears that airlines are clearly resuming operations and filing significant schedule plans for the coming months?

It is clear that Jun-2020 will be a key month in the recovery of air capacity, but while flights are being added there is significant caution when it comes to frequencies. That will concern corporate travel buyers and corporate travellers who rely on the regularity of schedules to support their mobility. The question is will it blunt the recovery in business travel demand and that raises the 'chicken-and-egg dilemma'.

easyJet's recent announcement on its plans to build up its network over the coming months is a perfect example in the recovering European market. The carrier's phased return to operations will see it operating around half of its 1,000+ routes in Jul-2020 and 75% in Aug-2020, but frequencies offered will equate to less than a third (30%) of normal capacity during the period.

This appears to be the model that many others will initially follow. Lufthansa Group executive board chairman and CEO Carsten Spohr revealed this time last month at the company's AGM that the group would not be able to return to its old fleet size in the foreseeable future.

Last week he confirmed the group expects that 300 of its aircraft will be grounded in 2021 and 200 in 2022 due to reduced and only gradually increasing demand in light of Covid-19. In Apr-2020, the Lufthansa Group airlines recorded a 98.1% year-on-year decline in passenger numbers to 241,000. Supply fell by 96.0%. The seat load factor fell by 35.8 percentage points to 47.5%.

Now, with a EUR9 billion stabilisation package agreed with the German government as the latest step in the complex state rescue of Lufthansa, which sees it take an initial 20% stake in the airline, Mr Spohr has highlighted how the airline intends to fly into the 'new normal'.

"Our aim is to serve many destinations using smaller aircraft and operate lower frequency patterns initially, " he explained during an earnings call last week. "We'll focus on expanding the width of our network (by resuming flights to cities it flew to before the pandemic), and at the same time minimising our commercial risks. Once the network is sufficiently wide, we will concentrate on serving high demand markets by reintroducing additional frequencies."

This is a strategy that will be adopted group wide with SWISS also outlining a similar proposal on its network out of Switzerland. The airline plans to gradually expand operations in the coming months, but while serving 85% of its normal destinations by autumn 2020 it will only be operating at around one-third of normal capacity.

Given the close relationship between economic growth, trade and international business travel, it is unsurprising that the unchartered airspace that the Covid-19 pandemic has taken us into along, with the slump in consumer confidence and business investment, will have a significant impact on business air travel and its recovery.

For corporate travellers the level of frequency, flexibility of tickets, total journey time and timing of flights have a significant impact on business travel demand. Airlines like easyJet have successfully evolved from LCC roots to be an increasing popular choice for business travellers, thanks mainly to its connectivity and frequency, boosting the latter being a key part of its recent growth strategy ahead of Covid-19.

But, with frequencies cut this offer this will not be as attractive to business passengers, especially from small and medium sized enterprises in Europe's regions that have particularly benefited from these increased flight frequencies.

At the route level, an airline operating a greater number of frequencies should, in principle, be able to attract a greater proportion of (higher yielding) time-sensitive passengers. It is therefore pretty much a given that the ability of airlines to attract business traffic, and in particular corporate contracts, is greatly influenced by the scope of its network and relative frequency of flights. But, what comes first?