-Analysis-
SANTIAGO — Back in May, I wrote that full-service airlines should start analyzing the costs, benefits, and impact of the demand of business travel, and see whether they would profit from reducing seats in executive class cabins, and from developing products like the premium economy class, which lies between business and economy in terms of comfort and price. They should start doing this in the last quarter of 2021 — I wrote back in May — especially considering that the demand for business class seats and its revenues were unlikely to recover in the following 12 months. And that is what is happening now.
Changes in business travel patterns are clearly evident today because the way people work has changed for good. Thus airlines must be flexible and adapt, especially when a significant change in passenger demand is expected. By way of reference, full-service airlines (i.e. airlines that offer full services and higher prices, unlike low-cost airlines) generate 70% of their revenues and 50% of their traffic from the business travel sector. Indeed business travelers are the lucrative sector that directly assures profitability for these airlines.
Airlines adjusting to changing travel patterns
Today, changing travel patterns have already led to airlines offering new products and reconfiguring cabins.
In Europe, Lufthansa Airlines has premium economy cabins in more than 100 long-haul planes and plans to expand this product in 2022. Colleagues in the sector have told me that at least two other European airlines will announce cabin reconfigurations to boost premium economy products in the first quarter of 2022.
In the Middle East, Emirates offered travelers a limited premium economy cabin in 2021, preferring to first test the market before diluting or ditching its business and executive class products. The airline is currently carrying out an important reconfiguration program for 100 wide-body planes. Emirates wants to install premium economy cabins in 53 of its Boeing 777 planes and 52 A380 planes over 18 months. Qatar Airways and Etihad will very likely follow suit.
Premium economy cabins are nothing new, and began years before the coronavirus pandemic. But the pandemic-induced crisis in passenger demand has given them a boost.
In Latin America, three full-service airlines currently under bankruptcy proceedings may also have to change their business strategies in medium and long-haul flights, including through greater use of premium economy at the expense of business or first-class products. I do wonder why the strategy was not considered before as part of their restructuring processes, especially noting the changes in business travel patterns.
In the case of LATAM and Aeroméxico, their “plus” sections in the economy cabin are not new products. The airlines may charge more for those seats, but as a product, they generate fewer revenues than a novel premium economy option.
Maximizing revenues through premium economy
On average, premium economy seats are 10% wider than economy seats but generate more revenue. So, wouldn’t it be convenient to add more seats to a class that could generate higher returns? This type of reconfiguration would also be less costly than introducing new business class cabins, which explains why airlines are warming to the concept.
Premium economy can help airlines maximize revenues both during and beyond the pandemic, and help widen profit margins as part of a varied strategy that includes passenger segmentation, profiling and loyalty. The concept works in both directions. Business travelers may well want to “downgrade” to a less costly service, which remains more comfortable than economy class. Also, many economy travelers may well be ready to pay a little more for better services offered in premium economy.
Premium economy’s benefits for airlines can include:
1. Reducing costs per available seat/kilometer or airline capacity;
2. Balancing the changes in travel patterns, purchasing habits and reduced corporate travel budgets;
3. Earning more from economy class travelers who want to improve their travel experience with an “intermediate” product;
4. Providing business travelers with a cheaper option that still provides “premium” services like separate check-in, Wifi, superior catering;
5. Maximizing revenues per passenger.
Finally, how many seats should the premium economy cabin hold? This depends on the route, departure times and the competition. But based on a global benchmark, a standard figure is that between 8% and 11% of the plane’s seats could be premium economy.
