As both scope of and demand for premium class air travel rise this year, travel buyers increasingly will need to tweak premium class travel policies to reflect the choices presented to their travelers.
In its 2019 Air Monitor, American Express Global Business Travel projects that demand for premium class travel will grow this year faster than airlines are adding premium capacity, which will lead to "strong fare increases to come across regional, transpacific and transatlantic routes." Late last year, several carriers already began adding surcharges to business class fares, according to the monitor.
Even as airlines have been adding premium class products, "they're taking planes and retrofitting them, not adding capacity," Amex GBT EVP of global supplier relations Mike Qualantone said. "For the negotiating environment, capacity is still constrained." In the meantime, some economy fares, particularly on transatlantic routes, will be stable, thanks in part to competition from long-haul low-cost carriers, according to the monitor.
So, does this potentially widening gulf between economy and premium fares mean more companies will tighten up their policies to reduce use of premium fares? Yes and no. Qualantone said overall, Amex GBT sees companies get stricter on business class. At this time, however, he sees a "strong openness" for the expanding middle ground: premium economy. "Corporates we're talking to see this as a good option to give comfort and amenities to their travelers," he said.
Premium economy—a distinct cabin from economy class, as opposed to "economy-plus" type offerings that largely are the same service offering as economy with more legroom and a few perks like priority boarding—has reached "critical mass" as U.S. carriers have expanded its availability on international routes, according to Amex GBT. United, for example, this month will begin adding 21 reconfigured Boeing 767-300ER aircraft, which adds 22 Premium Plus premium economy cabin seats and expands its Polaris class seating from 30 seats to 46 seats, to its fleet. That process will continue through the end of 2020. The first will serve its Newark-London route. United EVP and chief commercial officer Andrew Nocella said the average Premium Plus fare is running double the economy fare, "above what we had planned for."
American Airlines last year added its premium economy to 100 out of a total 124 planned aircraft, making it the carrier with the most aircraft with premium economy cabins in the U.S., president Robert Isom said. As with United, those fares are running at about double the economy fare. "Installations remain on track, and we expect them to be complete by this summer," Isom said. "When we look at the booking profile for this product, it's clear that customers are buying up from the main cabin." Delta plans to deliver its Premium Select cabin to all its widebody flights by 2021.
As of yet, few corporations have incorporated premium economy into their policies, according to the monitor. Airlines, however, are "very open to negotiating premium economy," eager for corporations to see it as an option for their travelers, Qualantone said. Airlines are finding other ways to expand demand for the cabin, such as American Airlines' decision this year to enable them to be booked with miles. That strategy also will buffer them should the U.S. economy take a bad turn.
"If there was a downtick in demand, we're more than confident that all the new products and services and … the broad ways we're able to offer them, including the pay-with-miles feature, would be able to offset weakness in demand," Delta CEO Ed Bastian said. "Eventually, we will face a recessionary environment, and we're planning for it."
History Repeating
For those with a few decades of experience in this industry, this evolution is nothing new, ICF Aviation Group VP Samuel Engel said. Decades ago, when Qantas, British Airways and the now-defunct Braniff pioneered different versions of business class products, the situation was "identical to the premium economy product today," Engel said. "Corporate travel policy said you couldn't fly first [class], but there was a willingness to spend more than the economy fare."
Over time, business class has evolved with lie-flat seats, high-end dining options and other amenities that blur the lines between it and international first class, as opposed to simpler two-cabin first class on shorter flights. As such, international first class is "going the way of the dinosaur," Tronos Aviation Consulting managing officer Gary Weissel said. "Only about 20 or 30 carriers are out there flying true international first class," Weissel said. "Every few years, another carrier removes it."
Its relevance to business travel also is in decline, Engel said. On a handful of routes, such as transcontinental U.S. routes, demand is such that investment bankers and other wealthy travelers are willing to shell out the high first class fares, he said. For much of the rest of the routes, first class serves as more of a "revenue management buffer," via which airlines can overbook business class and use it as an upgrade reward for loyal business class customers. Or, it can serve as a "brand halo," creating exquisite, headline-grabbing accommodations for brochures and publicity.
"When you think about Emirates, you think about first class in the A380 and its shower," Engel said. "You never think about how they had the densest configuration in economy class." Business class, meanwhile, is nearing the pinnacle of where it can go. New seat technology and adjustments to the geometry of layouts are allowing denser configurations without cutting down on personal space and enabling all seats to have aisle access, Weissel said. Outside of that, tweaks have been more minor, he said. Premium economy, thus, could become the new battleground for airlines wanting to outdo one another. "If you look at some of the more extreme, spacious premium economy seats, they look like business class was 10 or 15 years ago," Weissel said. "There's more functionality in the seats and leg rests."
All this, of course, eventually will leave another gap between economy and the next level up, so airline marketers might as well start thinking of a name for that tier now.