The travel industry has been deeply affected by COVID-19. Global travel has ground to a halt, and for the time being the pandemic has put the kibosh on an airline industry recovery. However, many households -- myself included -- are itching for a vacation. Some investors have thus dumped money into airline stocks on the expectation that travelers will come back with a vengeance once the coast is clear.
However, the emergence of Zoom Video Communications (ZM +1.24%) and other video conferencing services makes me think the airline industry will never be the same.
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The pre-pandemic state of travel
It's no shock that airline stocks are struggling right now. Delta (DAL +3.48%), for example, reported an 88% drop in revenue during the spring 2020 quarter ended June 30, driven by a 94% evaporation of its passenger ticket sales. Airlines are scrambling to cut costs until the situation improves, but it's taking much longer than anticipated.
But the situation is temporary, right? I'm not so sure. While I believe leisure travel will make a rebound in 2021 -- assuming there's a vaccine, treatment, and subsequent taming of the novel coronavirus -- it's important to understand how airlines make money. Pre-pandemic, business passengers were estimated to be about 12% of the total. However, those minority passengers accounted for as much as 75% of profits.
The reason is that business-related travelers typically spend more -- like on upgraded seats, last-minute bookings, itinerary changes, and other services. Let's use Delta as an example again. Of the $42.3 million in passenger ticket revenue the company generated in 2019, $15.0 million of it (or 35%) was attributed to business cabin and premium tickets. That doesn't include those business travelers who opted to fly via the main cabin with the rest of the masses. In Delta's latest quarter, business cabin tickets fell 95% from a year ago, in lockstep with main cabin tickets.
The "redundancy crisis" will have long-term implications
Business travel will surely start to come back along with leisure travel as the effects of the pandemic ease, but I think the lucrative business segment recovery will be a far slower affair. Long term, COVID-19 won't be the airlines' worst enemy -- it will be Zoom and a number of other digital tools that have been booming in recent months.
A big reason stock indices like the S&P 500 are back to making new all-time highs -- even as the economy overall continues to reel -- is that the digital economy has never been stronger. While many everyday consumers can account for this phenomenon (like increased use of e-commerce), many of the gains have come as businesses adapt their spending to a new digital-first age. Recent adjustments to the Dow Jones Industrial Average bear this out, with enterprise software giant salesforce.com (CRM +2.73%) replacing old incumbent ExxonMobil (XOM +0.72%). But Zoom is one of the most dramatic examples on display.
In an effort to keep employees productive and to replace in-person meetings, organizations around the globe have flocked to the video conferencing upstart. The company's first-quarter revenue (for the period ended April 30) boomed 169%, driven by a 90% increase in $100,000-a-year or more customers and a 354% increase in business users with at least 10 employees. While Zoom has become a household name in recent months, it's businesses that make up the bulk of the company's sales.
New digital tools like Zoom are creating a "redundancy crisis," reducing the need for old services and replacing them with more efficient and profitable virtual ones. I believe this puts a permanent damper on future demand for business travel. As a business owner myself, I can attest to the fact that Zoom has drastically altered what just a few months ago I considered a "must-have." With an annual Zoom contract in its arsenal, a business may think twice about booking that last-minute ticket for an in-person meeting when one can be had online. And the amount of business interaction that can now take place via the web (document signing, virtual tours, large-scale conferences) clouds the outlook for business travel -- which makes the airline industry a much less lucrative one than in the past.
I'm certainly not saying face-to-face business meetings will disappear entirely, but a permanent reduction in business trips is most certainly in the cards. Put simply, with the Dow Jones U.S. Airlines Index recovering from a 2020 decline of well over 60% to now down "only" 47%, I don't see a massive rally in airline stocks anytime soon.
