Lufthansa German Airlines' current long-haul premium class strategy on the surface may appear contradictory but the decision to eliminate first class on certain transatlantic routes while offering business-only seating on others shows a carrier tailoring its products for each market. The targeted strategy is being played out as recent data from American Express suggested demand from corporate clients for international business class, despite the prolonged economic slump, has not dropped disproportionally.
Lufthansa has been encouraged by passenger numbers on existing all-business class services between Newark and Düsseldorf
(BTN, June 3, 2002) and this spring will expand the model to other business-centric routes. The carrier on May 19 will launch six weekly flights between Newark and Munich, followed on June 9 with six weekly business flights between Chicago and Düsseldorf.
Importantly, these services also are available to United Airlines' customers via the carriers' codeshare partnership and are included in both carriers' corporate agreements—therefore subject to discounting. Mathias Friess, Lufthansa director of passenger sales in North America, said net rates based on volume are available to those companies that do not already have an existing contract with Lufthansa, United or both.
"Corporate clients complained after the United flight [between Chicago and Düsseldorf] disappeared in January, so we introduced that service to regain those with large volumes on that O&D," Friess said, noting also as ideal candidates several existing clients from such feeder markets as Detroit, Indianapolis, Kansas City and Minneapolis.
Meanwhile, the Newark-Munich flights are marketed to corporations for the connectivity offered through Munich. Friess said he has been pleasantly surprised by the number of Manhattan-based clients that cross the river to use the existing Newark-Düsseldorf service and that Lufthansa's share in the market has increased as a result.
Geneva-based charter provider PrivatAir furnishes all three nonstop services on either Boeing Business Jets or Airbus A319s, both in 48-seat configurations.
"They are coming into the marketplace as the marketplace is shrinking," said Phil Dunphy, senior manager of global travel at New York-based Pfizer, "but it is a great concept that allows them to better serve important customers."
"We have been watching it carefully, and it is an interesting idea," said David Noyes, British Airways executive vice president of sales and marketing in North America. "The only question is if it will attract business travelers who are looking for a flexible schedule." BA, for example, focuses on providing transatlantic frequencies from its U.S. gateways, including 11 daily flights from the New York area to the United Kingdom. Noyes further suggested that the business-only concept might not be as well suited in the United Kingdom where markets are "thicker," compared with dispersed, medium-size markets in Germany.
Meanwhile, Lufthansa beginning this month no longer offers first class on flights between Atlanta and Frankfurt, following similar service changes on flights between Frankfurt and both Boston and Philadelphia
(BTN, Jan. 20). The two-class configuration also will be brought to one daily flight between Frankfurt and New York JFK and on flights to other international destinations.
First class, however, will remain aboard all other intercontinental aircraft, including those servicing the Portland, Ore.-Frankfurt route set to launch next week
(BTN, Oct. 28, 2002). "First class is a premium product that will remain an essential element of Lufthansa's customer service in the future, wherever it is requested by passengers," according to the airline.
Yet, Lufthansa's decision to eliminate first class in select markets is indicative of an overarching industry concern about overall demand for premium products.
Following rapid improvements in first and business class cabins throughout the more profitable 1990s, no U.S. carrier, save Continental Airlines
(BTN, March 25, 2002), has invested significantly in premium class services, though Northwest Airlines plans to introduce its improved business class later this summer with the arrival of new Airbus A330s.
In another clear indication that demand for premium domestic services has not held, Midwest Express Holdings, parent of recently renamed Midwest Airlines, announced a series of cost-cutting measures. Citing the problem du jour—rapidly dwindling cash reserves down to just $30 million earlier this month—the all-business class carrier plans to suspend aircraft lease and debt payments, downgrade inflight food service, cut capacity, reduce frequencies and launch a low-fare airline in the third quarter.
Still, Midwest said it remains committed to premium service and recently took delivery of its first of 25 Boeing 717 aircraft. The carrier said the 717s are equipped with its "signature two-by-two wide leather seats."
Nevertheless, premium products throughout the sector have taken a back seat to cost-cutting efforts. "When is less more?" asked Tom Barrett, global strategic sourcing director at American Standard Cos. in Piscataway, N.J. "If airlines forget about their most important customers, I do not think there is any strategy they can effectively deploy to recapture the premium paying passenger."
Aside from Lufthansa, certain carriers overseas are a bit more bullish than their U.S. peers on the prospects for premium demand recovery. British Airways—which has maintained profitability in recent months—plans to finish rolling out its new Club World business class after curtailing refurbishments following Sept. 11, 2001. Noyes, who hinted at yet another wave of business class improvements slated for late in the year, said those routes without the Club World sleeper seats would see them before Jan. 1, 2004. On those routes where the product is available, Noyes said BA has gained marketshare during the past two years.
Club World is on the front end of a BA promotion that offers a return trip on the Concorde. To align the London-New York Concorde schedule for U.S. business travelers seeking to return after a full day of work, BA in April is shifting flights from earlier in the day to the evening.
At the same time, Concorde services, both at BA and Air France, currently are under intense scrutiny. Several recent inflight mechanical problems further cast doubt over supersonic operations that, at best, are break-even for the two operators. "The old girl is under more review than anything else because of the operating costs," Noyes acknowledged.
Meanwhile, All Nippon Airways on May 4 will introduce its new first class product and sleeper seats in business class on daily flights between New York JFK and Tokyo. The refurbished first class cabin already is in place on London-Tokyo flights
(BTN, Sept. 9, 2002).Amex: Slight Rebound In Int'l Biz ClassAccording to the American Express Business Travel Monitor, the company's corporate travel clients in the fourth quarter of 2002 on average booked business class for 49 percent of tickets on 160 international, U.S.-originating routes. That figure is down from 52 percent in 4Q00, but actually above the 47 percent figure recorded for 4Q01 when across-the-board demand was decimated by the Sept. 11, 2001, terrorist attacks. For the same base, first class usage in the fourth quarter was 4 percent of total international bookings, flat from the previous year and down from 5 percent in 4Q00.
The report also found the average one-way fare paid by corporate clients on those same routes was $3,462, up 4 percent from 4Q01. Unlike the more competitive domestic market, buzzing with low-cost alternatives, international routes have provided to major carriers some degree of pricing power, though pressure has mounted in recent weeks as demand is dropping in the face of war jitters.
These numbers from American Express show stable demand for business class, as a proportion of the total, despite years of talk about cost cutting and corporate purchasing discipline. Sources pointed to several factors, including a more favorable negotiating environment for premium international services, the need to provide a level of convenience and comfort for travelers burdened by the stresses of air travel and the fact that many corporate travel policies had been adjusted a few years ago—before Sept. 11, 2001, in many cases—and since have remained relatively unchanged, for now.
"We still maintain our business class policy for international travel," said American Standard's Barrett, "but if the economy continues to deteriorate, it may not withstand scrutiny in the '04 budget."
Certainly, some travel managers are tweaking here and there—extending by a few hours the minimum flight time at which business class is permissible, for example—and also point to budgetary constraints on the department level that prompt business unit-specific decisions.
As far as deal making, the environment has presented a mixed bag, dependent, as always, on carrier strategies and market conditions in each specific city pair. Some travel managers said their preferred carriers have not extended more favorable terms for premium international, while others said their deep discount levels have been maintained, if not sweetened.
"It is not a favorable negotiating climate for our clients, except for the high-yield fare classes. If there is any wiggle room or possibility of increased discounts, it is on international first and business class," said Larry Restiano, director of the customer value program and consulting group for American Express supplier relations. "In 2000, the pie was getting bigger. Now the pie is smaller, so the only way for carriers to get new business is to get it from the competition."