Pursuing Premium: Suppliers Add New Products To Attract Growing Number Of High-End Business Travelers - Business Travel News

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Pursuing Premium: Suppliers Add New Products To Attract Growing Number Of High-End Business Travelers

April 01, 2013 - 04:10 PM ET

By Jay Boehmer and Michael B. Baker

Since its founding, JetBlue Airways has had an egalitarian identity, providing all passengers with a single class of service, seat-back television, gratis snacks and a free first-checked bag.

But as the carrier grows out of its low-cost mold and attracts business travelers with an expanding network, some premium services have crept in. First there was the "Even More" ancillary, which gave passengers the chance to pay for extra legroom. Then came last year's introduction of a new loyalty tier for its most frequent flyers, and starting in May JetBlue customers in the carrier's Terminal 5 at New York's John F. Kennedy International Airport can make use of a new lounge operated by Airspace Lounge. Next up is perhaps the carrier's biggest pivot to attract passengers with deeper pockets: launching premium seating on transcontinental flights.

Scheduled for introduction next year, the enhanced product will be available on flights between New York and Boston and both San Francisco and the Los Angeles area, JetBlue chief commercial officer Robin Hayes revealed during a March meeting with Wall Street analysts. Details were scarce, but Hayes said the goal was to "wow" customers with both the product and its corresponding price point.

The move is yet another sign that airlines increasingly are tailoring networks and products to the most lucrative customer segments.

Outside of long-haul international markets—the bread and butter of premium-class travel—there is a something of a product race underway on the domestic U.S. transcontinental services on which JetBlue is putting its premium focus.

In the past year, American Airlines, Delta Air Lines and United Airlines each introduced new or upgraded services that greatly increase the availability of lie-flat seats on transcontinental routes.

For example, AA is introducing a three-class transcon product, making it the lone carrier supporting first and business classes on a single aircraft domestically.

"In the end, you're going to end up with three carriers in the United States that can pretty much take you wherever you want to go," said AA vice president of global sales Derek DeCross. "What really differentiates these airlines is product—and the people who represent your company."

DeCross reiterated what bean counters at network carriers know well: "The fact of the matter is, it's a very small percentage of customers who make up a disproportionate amount of the revenue." The airline's premium product upgrades, which like those of its competitors extend beyond transcontinental services, "are geared toward that sliver of the pie."

Worldwide, airlines in aggregate last year experienced further growth in premium demand. "The overall performance of premium travel markets has been solid throughout 2012, with passenger numbers expanding 4.8 percent for the year as a whole" compared with 2011, according to the International Air Transport Association.

IATA indicated that while last year's premium-traffic growth rate slowed from the 5.4 percent year-over-year increase in 2011, as some business travelers in Europe traded down to coach services amid the region's economic slowdown, premium demand growth elsewhere stayed strong.

It's a noteworthy turnaround after the global economic downturn that began in 2008 prompted some corporations to tighten travel policies and some airlines to scale back premium-class real estate.

Based on the expectations of U.S.-based corporate travel buyers surveyed in February and March 2013 by Business Travel News, premium demand this year should not abate. More than half of the 122 buyer respondents expected no change to their company's use of premium-class options this year compared with last, with those expecting increases outnumbering those expecting decreases.

According to AirPlus International data, premium-class policies for intercontinental flights apparently loosened somewhat in 2012 while remaining consistent for domestic and intracontinental travel. Last year, 22.6 percent of intercontinental flight bookings paid through AirPlus were for business class, compared with 20 percent in 2011 and 15.6 percent in 2010. Economy-class travel, meanwhile, accounted for 76.7 percent of AirPlus' 2012 volume, compared with 83.9 percent in 2010.

"Part of that is because the economy is getting stronger, and there's only so much tolerance for intercontinental flights in coach," AirPlus North America president and CEO Ron DiLeo said. "Part of it is capacity. There's a lot more capacity in business-class cabins."

There isn't anecdotal evidence this year of a major swing either way in terms of corporate premium-travel policies.

"You see corporates dialing up and down their travel policies all of the time as they review their budgets and as they make sure they're getting good value for money for that premium travel experience," said British Airways senior vice president of the Americas Simon Talling-Smith.

Filling In The Middle 

As the appetite for flying in the front of the plane stays relatively healthy, airlines far and wide also have bet on capturing higher-yielding economy-class passengers by introducing so-called "premium economy" products.

Since Virgin Atlantic in 1992 introduced its "Mid Class" (later rebranded Premium Economy), this category of airline product has blended the comforts and prices of coach and business classes. First, long-haul international carriers replicated the concept. More recently, U.S.-based airlines adopted such strategies for both international and domestic services. American, Delta and United in the past year each made moves to unveil or expand premium-economy products.

While they can attract standard coach customers, such classes of service also can tempt business-class passengers to trade down—a concern that United in 2011 evaluated before expanding Economy Plus to Continental aircraft. "Based on historical data, I'd tell you that we've generally seen it as a positive, that people are buying up," United senior vice president of sales Dave Hilfman told BTN at the time. "They are probably sitting in the economy-class cabin. In international routes, in particular, those intent on buying business class are still buying business class. It's just a different product."

Though Carlson Wagonlit Travel in a white paper released late last year wrote about the opportunity for companies to "save significantly by shifting from business class to premium-economy class," the agency also cautioned that "the potential cost savings should be weighed against the traveler impact in terms of productivity, stress, and more."

Among travel buyers responding to BTN's survey, nearly 34 percent characterized premium economy as a higher-cost alternative to economy class compared with the 21 percent who characterized it as a lower-cost alternative to business class. These sentiments appear to validate Hilfman's observation: Corporate travelers are more apt to trade up to premium economy than down to it.

Sapient senior manager of global travel Michelle DeCosta is heartened by the proliferation of airline premium-economy seating; her company allows travelers to pay the slightly higher-than-coach price point for international flying. While Sapient is "pretty strict around class of service"—largely shunning business class—its policy on premium economy is more relaxed. The firm also is willing to pay for add-ons that bolster comfort and productivity—be they access to a premium floor at a hotel, an upgrade to a better coach seat or the purchase of inflight Wi-Fi. "We have no problem with paying for ancillaries," said DeCosta. "We know [travelers] make the right decision."

"Every year we do analysis on business-class policy, but it's hard to take that away once it's allowed," she continued. Instead of creating policy thresholds for when travelers can fly in the front of the plane—based either on length of haul or employee title—Sapient has managed "case-by-case" exceptions for premium travel, allowing employees to make a request for a business-class ticket that is vetted by DeCosta and funneled up to senior management for approval.

Back Down To Earth 

BTN's research suggests companies are stricter regarding policies on premium-class hotels—which include luxury and upper upscale hotels, as well as club floors and other room types that come at an extra cost—than they are with air travel. Fewer buyers in the survey said that senior executives or frequent travelers are eligible to use premium-class hotel products compared with air. More buyers said that travelers were banned from using premium-class hotels than those who indicated bans on premium-class air. About a quarter of surveyed buyers said travelers could use upper upscale hotels, while less than 20 percent said travelers could use luxury hotels or club floors.

Most buyers said they don't anticipate tighter policies for premium-class hotels this year. The remaining minority was about evenly split between those who expected more and expected less 2013 premium-class hotel use.

Starwood Hotels & Resorts Worldwide senior vice president of sales Christie Hicks said that while cost still is a concern among corporate clients, "if you look at their accounts, their associates travel frequently, and employee satisfaction is becoming more and more important, especially if travelers are on the road 45 weeks a year. We see ourselves benefiting from that, particularly in the upper upscale tier."

Such is the case at Houston-based chemical company Ascend Performance Materials, where senior manager of indirect procurement Tom Barrett said premium-class policies remain fairly lax for both hotel stays and air travel.

"You're going to do a huge project, you're going to put a lot of money behind it," Barrett said. "Yes, there's somewhat of a constraint, but there's also competition for employees at this point, especially in the Houston market."

Premium-class hotel restrictions built into policies do not necessarily mean travelers are not using the products, particularly as hotel companies seek to introduce travelers to upper-tier products through rewards programs.

"I have personally been in conversations with corporate travelers who have said, through all of this, they will figure out a way to go outside of policy," Starwood's Hicks said. "The hook is working."

At the same time, buyers are facing more pricing pressure from premium-class hotel suppliers. Luxury and upper upscale hotel demand in the United States during 2012 increased by 3.1 percent and 2.1 percent, respectively, while supply growth in both segments was about flat, according to hospitality research firm STR. As such, average daily rates in 2012 compared with the previous year increased by 4.6 percent in the luxury tier and by 4.3 percent in the upper upscale tier. While several hotel companies aggressively are growing their upper upscale and luxury brands, that growth largely is in developing markets including South America, China and Africa.

In fact, STR reported that the number of luxury hotels under construction in the United States as of February literally can be counted on two hands: 10 total projects, with seven of those in New York, Chicago or Orlando. As of the end of 2012, 4,500 luxury hotel rooms and 7,300 upper upscale hotel rooms were under construction in the United States, compared with more than 20,000 rooms under construction across each of the upscale and upper midscale tiers.

That is not to imply that hoteliers are not investing in premium-class products in the United States. Sheraton, for example, recently invested more than $120 million to upgrade club lounges around the world. Paid club room occupancy since has increased by 41 percent in North America, according to Starwood.

This report originally appeared in the April 1, 2013, edition of Business Travel News. 

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