Sourcing and Procurement
Impact of Geopolitics on the Business Travel Industry
It is no secret that the business travel industry was heavily hit by COVID-related restrictions in the past 2 years. In February this year, however, signs of recovery started to show, with the industry registering one of its strongest months. But, by the end of the month, fresh woes landed on the business travel industry with conflict brewing in Europe.
This led to new travel bookings being weighed down by mass cancellations. The outbound business travel market, especially in Russia collapsed by 80% during the first month of the conflict, with 11 airports suspending international operations. The Russian domestic business travel market also started to suffer quickly, predominantly due to uncertainty among potential travellers.
With manufacturing and supply support also impacted, another consequence has been that Russian airlines are left with very few planes to operate in compliance with IATA rules for international passenger air transportation. Due to existing valid maintenance calendars from manufacturers, it is expected that airlines will run out of spare part stocks within a few months.
A domino effect
The entire world is feeling the impact of this geopolitical crisis. Flight ticket issuance during the first weeks of the conflict plummeted across Europe, including trans-Atlantic bookings, with a few exceptions. As of 25 March 2022, air travel between Russia and 36 countries globally, came to a standstill. Several airlines from other countries also temporarily reduced flights to/from Russia.
Several countries that are highly dependent on Russia and Ukraine for their air passenger traffic, have not suspended flights at this stage. Generally, the closer a country is to a conflict, the more vigilant people are about their future travel plans, business or leisure. Apart from Europe, Asia is the second most impacted region, with the Americas, Australia, and the Middle East feeling a low impact on ticket sales. What is visible from the numbers is that global international ticket sales have so far held relatively well. Globally, international ticket sales for future travel increased from roughly 55% of 2019 pre-covid levels in February to 57% of 2019 levels in March.
With oil prices also surging as an impact of the crisis, most airlines are already adding fuel surcharges to their prices, making air travel costlier. As per available data, such an increase is 15% per ticket globally. Jet fuel prices rose sharply since the start of the conflict. It was at $150 per barrel on March 21 (daily closing prices), up 39% month-on-month and 121% year-on-year. Upward pressures on prices may continue if current trends continue with respect to the Russian energy sector and depending on potential increases in production elsewhere. However, it is important to mention that many large airlines are usually hedging their fuel consumption to mitigate the impacts of volatile prices. For example, Qantas has hedged 90%, Ryanair 80% of its fuel consumption but large US airlines such as Delta, United or American Airlines are not hedging their fuel demand at all.
Clearly, the business travel industry has slowed down significantly, especially in countries that are closer to the conflict. The industry will need to cope with three main adverse effects of the current situation – a drop in demand caused by security fears and general uncertainty caused by the volatile situation; loss of revenue for suppliers strongly dependent on the region; and rising fuel costs that are increasing travel costs.