Banking on premium economy

EVEN as the airline industry looks forward to reaping a net profit of US$8.9 billion this year – tripled the previous forecast – industry experts are not convinced the upward trend can be sustained. Already there are signs of a slowdown heading into the last quarter, and the International Air Transport Association (Iata) is forecasting profits to fall to US$5.3 billion in 2011.

Iata chief Giovanni Bisignani warns: “It’s no time for a big celebration, just a small party.”

Against this background of continuing uncertainty and increased competition from budget carriers, major airlines that are banking on a resurge of business travel in the front end of the aircraft are re-thinking their product mix.

Cathay Pacific Airways, which has been pushing back plans to introduce a class between business and coach, looks set to roll out the product by 2012. Early in the year, Cathay chief executive Tony Tyler told Bloomberg: “There are pretty good arguments for it.”

Premium economy, however, is not new. Pioneered by Taiwan’s EVA Air in the 1990s, many airlines have similarly introduced this before the economic downturn. Singapore Airlines (SIA) used to offer Executive Economy on its non-stop flights between Singapore and Los Angeles as well as New York until it decided to reconfigure the aircraft as exclusively business class.

Many airlines are beginning to recognise premium economy’s cash cow potential, thus the renewed effort to market the product. Its appeal lies in wider seats and more legroom than in economy, more crew attention and, varying from airline to airline, perks such as better meals, premium wines, in-seat power points for laptop use, wider TV screens, exclusive cabin for added privacy, additional baggage allowance, priority check-in, boarding and disembarkation, and the flexibility to change flights without penalty.

It looks like value for money. You pay not half as much but get a good dose of business class treatment.

Flying business class (and, of course, first class) is as much about status as it is about comfort. However, companies crunching numbers during the global recession have found it expedient to overlook the psychological feel-good factor as they downgrade executive travel. Now airlines are reworking strategies to recoup that lost business.

Major airlines such as SIA and Cathay which in better times derive more than 40 per cent of revenue from the upper classes have reported a return of the traffic but there is no telling if it has regained its erstwhile level. Premium economy seems to be the answer, not to replace business class but as a step nearer that ideal. The traditional 3-class configuration of first, business and economy may well be replaced by a new standard of business, premium economy and economy. It’s a matter of nomenclature.

Qantas, which first introduced premium economy in 2008, has plans to expand premium economy availability. Chief executive Alan Joyce told The Age: “With the configuration changes that we’re doing, we’re going to grow the premium economy cabin by 26 per cent and that’s an initiative that we believe will also improve the yield mix and the premium traffic.”

Other airlines that have introduced this include Air New Zealand (whose Skycouch will allow passengers to lie flat), British Airways (which goes by the brand World Traveller Plus), Virgin Atlantic, Scandinavian Airline System, Air France, KLM, Air Canada, United Airlines, Japan Airlines (featuring the JAL Sky Shell Seat which won the 2008 Good Design Award) and All Nippon Airlines. Even budget carriers that boast business class availability are by comparison offering in reality a version of premium economy.

With Cathay set to join the ranks, noticeably absent in the Asian “A” list are SIA and Emirates Airlines. These two airlines, among the world’s most avant-garde, have so far been silent on any plans to keep up with the Joneses. Will they pay dearly for staying out?

SIA for its reputation stands to gain more than most airlines as the economy recovers. There are already signs of the business class cabin filling up. So while its rivals busy themselves with pushing premium economy, SIA may even sell on being one that is truly premium, not economy attempting to be premium. It will be spared the problem that competitor airlines may face as the economy continues to strengthen, when loyal erstwhile business class travellers find themselves too comfortable in the mid-class to want to move up even as they can afford. The risk is SIA customers switching loyalty for the cheaper alternative.

In light of air travellers’ changing preferences, SIA may be losing out on new business opportunities. Early studies have shown that about 40 per cent of passengers are business travellers, and at least half of them travel in economy. Premium economy is the carrot for those with limited budgets. There is also a new generation of leisure travellers who will spend a little more to enhance their holiday experience. JAL is targeting baby-boomer retirees with money to spend on themselves.

When European airlines first introduced business class, then Swissair (predecessor of Swiss International Airlines) insisted it would stick to its 2-class configuration of first and economy. It had to eat humble pie subsequently.

Don’t put it past SIA to surprise us. After all, its short-lived Executive Economy – the unfortunate victim of a Sophie’s choice – was popular among travelers. When that happens, expect Emirates to follow suit. The UAE carrier has for a long time after its inception prided itself as an airline modelled after SIA.

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Airlines innovate: Air New Zealand upgrades, Qantas downgrades

WOULD you pay for three economy seats to get a taste of some business class comfort? Air New Zealand (Air NZ) believes there will be a demand for its “Skycouch” where the seats can unfold to make a bed. This comes with a thin mattress and full-size pillows. The airline’s new Boeing 777-300 planes will be equipped with skycouches in the first 11 rows of the economy cabin, making up a quarter of all long haul economy seats.

Interestingly, Australia’s flag carrier Qantas is reducing its first class capacity by some two-thirds to increase economy class seating.

Both airlines are actually moving in the same direction. The recession has taken a toll on premium travel – not surprisingly that budget carriers are enjoying a healthy spin-off from the big boys – and full-service airlines are refocusing attention to where the money flies under present belt-tightening conditions, at least until the good times return with some certainty.

The real question is: Which segment of air travel will emerge as the new cash cow?

What both Air NZ and Qantas are doing is not something new. For many years, commercial air travel generally comprises only the two classes of first and coach until an in-between third business class is added. The popularity of the new class has led to some airlines reducing first class capacity or removing it completely to make room for more business class seats.

Singapore Airlines (SIA) became the first major airline to introduce an all-business class configuration for the long haul, commencing non-stop flights between Singapore and two American cities – New York and Los Angeles – in 2008, unfazed by the earlier failure of upstarts (Eos, MaxJet and Silverjet) which offered cheaper options albeit operating in a different geographical region. It was a bold initiative which other major airlines are still not fully convinced will work, and it was only more than a year later that British Airways (BA) decided to also test its viability, inaugurating an all-business class flight across the Atlantic.

BA chief executive Willie Walsh, who expected the new service to be profitable within a year, said: “In the harshest trading environment airlines have experienced, we believe it is more important than ever to embrace the future and innovate.”

It may be too early to tell whether the BA strategy will work, but what Mr Walsh has said holds the key to surviving the competition, hence too the announcements by Qantas to downgrade and Air NZ to upgrade. With some early signs of recovery, it is to be expected that premium travel will regain some of its lost business. But, to what extent?

Air NZ ‘s strategy identifies a sub-class of travel between economy and business – the skycouch that is more aptly premium economy. The concept is not entirely new. Taiwan’s EVA Air already has a small number of deluxe economy seats that offer more legroom than the normal economy seats. SIA operated executive economy between Singapore and Los Angeles before converting the flights to an all business-class configuration.

What Air NZ has done is raising the creature comfort to further differentiate the product. It may well be the emergence of a new class of its own, the way that the business class originated. (As an aside, it is impressive how this airline operating out of a remote corner of the world is beginning to break through the clouds to be noticed: remember the avant-garde safety video it produced some six months back that became the talk of the sky for a while?)

The recession has changed the patterns of air travel somewhat. Airlines must adapt quickly to the shifts and continue to innovate to keep flying. There is a painful lesson to learn from the bankruptcy of Japan Airlines – even an airline reputed for its traditional brand of quality service cannot afford to stand still.