Premium Class Begins Comeback

Corporate travelers slowly are making their way back to the front of the plane for long-haul international journeys after a year marred by deep declines in premium volumes, while carriers once again are investing in product and in some cases adding premium capacity.

Though it is unanimous that premium class passenger counts and yields are improving from the depths of 2009, they remain well below their peaks, and carriers anticipate a long slog toward full recovery—keeping buying power on the corporate side.

"It's still a buyer's market," Advito vice president Bob Brindley said. "The carriers will be very quick to admit that while their premium demand is creeping up, it certainly is not where it was for most of 2008. Even though they've cut capacity back, they still have a lot of premium seats to sell and it's still a very competitive market."

According to new American Express corporate client data, premium class utilization hit a low in the second quarter of 2009 when only 36 percent of tickets sold were in first or business class cabins. Since then, that number has climbed quarter over quarter and, for the last three months of the year, 42 percent of tickets were for premium class travel. Still below a recent high of 49 percent in the third quarter of 2008, American Express said those numbers show that "travelers are coming back to the road, and there is slight movement to the front of the plane."

International Air Transport Association global traffic data for December 2009 released last month showed the first year-over-year increase in the number of premium passengers since May 2008. In December, 1.7 percent more passengers flew in first or business class than in the same month in 2008.

"2009 was a year of very distinct halves, with severe recession early in the year and post-recession upturn in the second half," IATA said, noting the low point for premium travel came in May 2009, when high-yield traffic fell 25 percent from the same month in 2008.

Premium passenger numbers grew 11 percent through December, IATA said. Even with its first positive year-over-year posting in the last month of 2009, however, the overall size of the premium market remained 17 percent smaller than "the size of the market in early 2008," IATA said. "This implies that premium travel has lost six years of growth."

Though first and business class tickets represent only 8 percent of all tickets sold, according to IATA data, they accounted for 25 percent of airline revenue in 2009—even during a recession that pounded yields and decimated passenger numbers.

British Airways, whose first and business passengers account for roughly 50 percent of revenues, is among major carriers reaffirming commitments to the premium market.

The carrier at the height of the recession launched all-business-class service between New York's John F. Kennedy International Airport and London City Airport. This year, BA said it would pump £100 million to install a new first-class cabin on 73 long-haul airplanes in the course of about two years. The carrier in February said it would launch a second route—between Washington, D.C., and Paris—for its all-business-class subsidiary OpenSkies, whose very fate had been in question in the past year.

CEO Willie Walsh believes in the front of the plane. "There's no question that long-haul premium will recover as global economies improve, and we're seeing that trend already," he said. "We're very happy to continue to invest in that product."

Though the future of short-haul premium class travel is structurally damaged, Walsh told BTN, long-haul premium demand is cyclical. "We'll see a recovery in long-haul premium volumes, but I think it will be a slow recovery. There's still question marks over a number of key economies around the world, but the trends are much more positive in February 2010 than they were in February 2009. It will take us a long time to get back to the volumes we saw at the peak—which was 2007, 2008—but they are going in the right direction."

Singapore Airlines in 2008 launched all-business-class transpacific service to Newark and Los Angeles, but last year reduced service from daily to five days a week in response to the lull in premium demand. Singapore Airlines regional vice president of the Americas W.K. Lim told BTN last month the carrier is restoring Newark service to daily.

"We have been seeing the demand picking up in the past couple of months, and for flights for the Newark service, passengers are wait-listed," Lim said. "This is really in step with the marketplace demand. This is also a barometer of the economy and in tandem with the improving global economy."

Lim agreed that the ailing long-haul premium market of the past year was cyclical, not permanent. "This happens in almost every economic downturn," Lim said. "Companies become price-sensitive and opt to downgrade premium class or even to not travel. Because of the global economic pickup, we're seeing travel come back in all segments."

The investment in premium cabins is hardly the province of foreign airlines whose identities are linked to upper class products. Domestic legacy airlines from Continental and Delta to United this year have invested in premium service.

Delta this year said it would install flatbed seats in BusinessElite class on 90 transoceanic aircraft.

United last year upgraded the premium cabins on its Boeing 767 and 747 fleets, president John Tague said.

"We will begin the work to add new first and fully lie-flat business class seating to our fleet of 777," Tague said in United's January first-quarter earnings call. "During the fourth quarter, we clearly saw strong evidence of a recovery trend which accelerated as we progressed through the quarter."

Like United, Continental initiated premium upgrades before the height of the recession, and like United, the business class volumes and yields of the past year did not alter upgrade plans.

Continental introduced its first fully flat international seat-cum-bed in September 2009—viewing that investment not as a gamble on luxury in a time of frugality, but rather an imperative to capture premium marketshare.

"We believe that we've been losing some customers that we otherwise could have attracted, especially on really long-haul routes, because we didn't have flatbed seats," said Continental executive vice president and chief marketing officer Jim Compton, adding the carrier expects to outfit its Boeing 777 fleet with the new seat by year-end.

"There's been a bit of a pick-up," Advito's Brindley said, "but the question is: Is this pent-up demand that will just be a blip or is this truly a recovery? We'll probably learn the answer in the July/August timeframe."