Changes In Demand For Air Travel

Department of Air Transport at Cranfield University

The increase in globalisation, and freedom of movement of people and goods within and between regions are factors affecting demand positively.

The business travel market has seen a marked change in recent years but remains vital to the airline industry. The airline industry has long relied on the business travel market as a major source of profit. As illustrated in Table 1, although nearly 15% of the IATA airlines’ capacity is allocated to business class it generates 28% of airlines’ revenue. More importantly, the airlines’ operating profit margin from business class in 2002 was 29% compared to 5% from the economy class. First class does not usually generate profits. This can explain many airlines move from a three to a two-class cabin in recent years.


Table 1: Passenger services results by class of service

Class of








Yield per






Operating Ratio

Revenue as % of Total Costs

First 2.4 36 23.5 3.8 73
Business 14.8 52 18.8 28.1 129
Economy 82.8 77 5.5 68.1 105
Total 100.0     100.0  

Source: Airline Economic Results and Prospects, IATA Airline Economic Task Force

The slow down in the economy has led to a reassessment of the assumptions under which the airline industry, especially large network carriers, were developing their business. One of the key assumptions was that business or time sensitive passengers are inelastic with respect to fares. They would be prepared to pay increasingly high prices as long as they can receive a high quality of service including reliable and frequent flights, flexibility, good frequent flyer programme rewards and comfortable seats.

A fall in the take up of business class tickets and increased downgrading behaviour has shown that the business market does display price elasticity. This has been particularly evident in the short haul market with the arrival of low cost airlines. The industry is coming to terms with the fact that a large proportion of passengers have chosen price over service. They seem to be prepared to give up frills, choice or flexibility in return for lower prices. This is certainly very evident on short haul routes. For example, the number of short haul European business class trips from the UK has fallen dramatically from nearly 65% in 1991, to 25% in 2003. It is forecasted that as few as 15% of short haul business trips will be taken in business class by 20061 .

A study by CWT Solutions Group2 also confirms that business travellers have not only given up extra comfort in favour of economy class on domestic and intra European flights but are also willing to trade ticket flexibility in return for low fares. A survey of 110 US companies by the Business Travel Coalition in 2003 indicates that the cutbacks in business travel appear to be permanent. Almost three-quarters of the respondents confirmed that they have increased the use of low fare airlines. Similarly, their use of non-refundable tickets increased from 51% in 2000 to 58% in 20033.

The reason for the decline in business class travel is partly supply led; high business fares which stretched the so called “inelastic business class passenger segment” and expansion of low cost airlines; and partly demand led: a more active management of travel budgets by corporations anxious to reduce costs mainly due to the economic downturn; external shocks, including the 11 September terrorist attacks; SARS epidemics; and the Iraq war.

Figure 1: Shifting pattern of business travel
% of business travellers in premium cabins, 4 quarter average

Shifting pattern of business travel
Source: British Airways, 25.08.04

Figure 1 illustrates the decline in business passengers travelling in business class on British Airways.

All this does not mean that business passengers are not prepared to pay a premium for additional services or frills offered by business class, especially on long haul flights, but they would like a justification for the price premium asked by airlines.

In response to the fall in the number of travellers in business class, airlines such as Aer Lingus will remove business class from its European routes, while SAS is adding another class called ”Economy Flex” which offers some of business class benefits at a price, which is 80-90% of business class fares. Overall, it appears that the industry is acknowledging that the recession is producing change that may not be cyclical in nature.

Another major change in the travel market is that passengers have embraced the internet as a major distribution channel. Table 2 gives the online ticket sales by region. US is leading the way with 37% of tickets sold online, while Europe and Asia Pacific are somewhat below this level but are likely to increase online sales in the future.

Table 2: Online ticket sales by region



Own Airline


All online


E-tickets issued
Industry average 11.0% 14.5% 19.1%
North America 29.5% 37.1% 41.4%
Europe 15.2% 16.0% 20.7%
Asia Pacific 7.6% 10.2% 16.5%

Source: Airline Business, July 2004

It appears that corporate's increasingly book simple point-to-point trips online and more complex itineraries are dealt with by their Travel Management Companies (TMCs). Self-booking tools are being rapidly embraced by corporate's. Also, according to a study by the Business Travel Coalition, a growing number of corporate's, 73%, believe that airline contracts are less beneficial than previous years4.

Changes in demand for leisure travel include more short term breaks and more independent holidays where passengers book flights, car and accommodation by themselves. This has had some implications for charter airlines, as passengers are questioning the need to use these when they can get low fares on scheduled airlines that offer greater flexibility.

A recent study by UK CAA confirms this trend, illustrating that the highest growth has taken place in the number of passengers staying abroad for less than three nights.

UK residents leisure travel abroad – visits by length of stay

UK residents leisure travel abroad

Nil nights 1-3 nights 4-13 nights 14 or more nights
-3.6% 9.6% 7.6% 2.3%

AAR 1998 – 2003
Source: CAA, UK, 2005

The same study also indicates that while the number of UK independent travellers in 2003 has grown by 15.6% the number of travellers using inclusive tours has declined by 1.9%.

The trend in leisure passengers indicates that they expect and continue to expect low fares. The low fares have been the main stimulus for growth in leisure travel, with passengers being prepared to switch destination for good deals.

Overall, passengers have become more empowered due to transparency in price and service information, and it appears that passengers are becoming more value conscious, demanding choice, and flexibility. However they are prepared to give up frills, choice or flexibility in return for lower prices. This is certainly very evident on short haul routes.

The above trends in business and leisure passengers travel behaviour raise a number of questions, including the followings:

What are the implications of these changes for airlines and airports?
How can airlines and airports get close to their customers, in order to anticipate behavioral changes in demand in the future?
How customer loyalty could be ensured?
How travelers will book flights in the future? Which channel of distribution will be most popular?
How airlines will manage their revenue in an environment where price transparency is here to stay?
How airlines and airports can work together to market their services and meet the needs of their customers?

1 Growth and restructuring in the global airline industry. Presentation at Cranfield University by Dr Andrew Sentance of British Airways, 7 October 2003
2 European Air Trend Survey, Carlson Wagonlit Travel, 2004
3 Business Travel Coalition, ‘2003 US Business Travel Survey and Analysis
4 Business Travel Coalition, Restructure more fully or die, March 19, 2004

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