Describing how the recession has changed the fundamental structure of airlines, professor and airline analyst David Jarach of Milan's Bocconi University this week cited the examples of Lufthansa reducing premium class seats and Air France/KLM canceling business class on intra-European routes. Speaking during the Association of Corporate Travel Executives conference here, Jarach said these and other moves are responses to the widespread drop in international premium-class travel and resulting "yield depression."
"Business class on intra-European routes is at risk," said Jarach. "On long-haul routes, the chance to survive is higher, but … one candidate for disappearing is first class. This is a trend that started some years ago for U.S. carriers, but [now] only Asian carriers will continue to maintain those first-class services."
Yet, Jarach noted that at least on some routes with large aircraft, airlines simply cannot be profitable without premium class. "Try to figure Lufthansa flying only with leisure travelers at €20 [each]," he said. "Of course you can fly a 747 with 300 people and lose a lot of money, or a 747 with 20 people in business class and make a lot of profit."
While some carriers are "reducing the size of their business-class cabins … no mainstream airline has removed business class entirely, even from its short-haul fleet," noted a recently published white paper by AirPlus International.
Continental CEO Larry Kellner in an August interview with The Transnationalsaid his airline's domestic premium cabin is "slightly smaller" on some fleet types. "I wouldn't want to get rid of them," he said of the first class seats. "There is a group of people, while small, that is willing to pay for that premium seat. Customers say, 'I don't need two feet more between seats. Just give me another six inches.' " More evidence of airlines maintaining a higher-end, short-haul product for those willing to pay, Kellner said, are new (but small) first class cabins on some 70- and 90-seat regional jets.
Long-Haul Adjustments
American Airlines and United Airlines are two U.S. carriers that offer first- and business-class cabins on long-haul routes rather than a single hybrid product. United Airlines is losing roughly 20 percent of its international first class seat count as part of a cabin reconfiguration, but growing overall capacity through additions in coach cabins. American has "not changed premium real estate," said vice president and general sales manager Kurt Stache, citing the cost and time needed for reconfigurations and the belief that "business will come back."
Yet other carriers including Cathay Pacific and Qatar Airways are considering first class reductions, according to a Bloombergreport. These deliberations come as the International Air Transport Association continues to report double-digit percentage declines in worldwide premium traffic. The latest numbers, from August, showed a year-over-year drop of 12 percent, the 15th consecutive month of declining first- and business-class volumes but the smallest drop-off recorded since November 2008
Another approach is to introduce premium economy seating on long-haul flights--as Air France/KLM and Alitalia have just begun to do after some carriers, including British Airways and Virgin Atlantic, offered it for years. Premium economy generates lower yields than business class but offers far higher returns than economy. Compared with his concerns about first and business class, Jarach was more confident that in five years "there will be a market for premium economy services. The drop of seats in business class to economy class is part of the game. The only problem is, you're selling the ticket at the premium economy prices, which is good for the passenger but not as much for the airline side." Still, he acknowledged premium economy is "no doubt" profitable. "I'm surprised that some airlines took so much time to implement this concept," he said. "Probably they lived on some monopolistic rents before the market changed."
United has a premium economy product on long-haul flights. "We're going to have to see where corporate travel settles out internationally between the Economy Plus cabin and business class," said United president John Tague this summer. "Any changes or adjustments we would make are obviously very long-term in nature. We do have opportunities to enhance what comes along with Economy Plus if we see a sustained appetite for long-haul corporate interest there."
Signs Of Health
Despite these moves by air carriers and such commentary by Jarach and others, there are anecdotal indications that the premium-class business traveler may not have disappeared for good.
"There are industries that are moving back toward the front," said Carlson Wagonlit Travel CEO Doug Anderson. "I know that based on client feedback. It's those industries that are starting to pay bonuses and feeling pretty good about their earnings releases. For six months or so, it was probably okay to have not quite the level of traveler comfort, but when things start to look better, travelers start to think differently about what they're willing to bear."
"There were many corporations that basically banned travel in first class or business first," said incoming Continental Airlines CEO Jeff Smisek this week during a Star Alliance eventin New York. "Imagine flying regularly between New York and London, and you are doing it two or three or four times a month. You want to arrive refreshed and ready to do business. It is much better to be in the front, especially since we put the flat bed seat on all of our long haul aircraft. Those travelers are basically going back and saying, 'Listen, I can’t get my job done. I waste too much time recovering when I am there. I waste too much time recovering when I am back, so you are being pennywise and pound foolish.' "
According to the AirPlus paper, "companies are at least thinking about what comes next and how, for example, that may affect policy on class of travel. Not many companies have relaxed their policies, but discussions from before the recession about traveler health and safety are returning. For example, how healthy is it to fly intercontinental in economy and then go straight into your first meeting? Companies are talking about possible upgrades. Some companies that downgraded to premium economy on long-haul routes have gone back to business class but are raising the minimum duration of the trip from six hours to eight. They found the policy downgrade was not always helpful because not every airline has premium economy, and discounted fares in business class are often lower."
Anderson's rough guess was that about one-quarter of the dollars cut by clients during the past year or so were due to changes in class-of-service policies on air, car and lodging. "Many clients restricted their travel policies and went from premium class to less-premium class travel," he said. "There is a mix of objectives around travel cost and ROI, as well as around traveler comfort and keeping travelers reasonably satisfied with what's happening with the program. Clients are focused on traveling more cost-effectively, but indications are that they are ready to start driving returns through continuing to invest in travel. They're going to be very selective and will assess the return on investment differently than they may have in the past."
According to a September survey of 99 ACTE buyer members, sponsored by AirPlus, about half of respondents downgraded class of travel and/or accommodation for their travelers in response to the recession.
"One of the things we evaluate is, if you change from premium to economy on those long hauls, what's the average number of hours someone will travel and still do business that day, compared with the need to go a day or two before?" said CWT executive vice president for global program solutions Cathy Voss. "And really, what is your total savings? You see the difference in ticket price versus hotels and meals, but what is someone's time's worth?"
"Travel managers have had to take care to ensure that downgrading is meaningful rather than symbolic, especially as higher-class travel is occasionally cheaper than lower-grade alternatives," according to the AirPlus white paper. "For example, Merck has attacked hotel costs by reducing the maximum permitted daily rate, not by creating rules on which standard of accommodation may be used." On the other hand, "some companies, especially in continental Europe, have downgraded travel but found a quid pro quo to keep travelers happy. They are telling travelers to fly at the back, for example, but allowing them one additional night at the destination to recover after a long-haul trip. The trade-off helps with workers’ councils but still works out cheaper for the company."
Merck also is asking travelers to think twice about whether an alternative to arduous or pricier travel would suffice. Merck has reduced costs by 30 percent and transactions by 17 percent year over year in 2009, partly with demand management techniques. For those trips that do happen, though, Merck director for mobility management and corporate procurement Christophe Carnier told ACTE participants that the company managed to exceed its savings goal of 25 percent without changing standards or downgrading from business class.
"Many experts think companies that have downgraded from business class for long-haul flights may return to the front, albeit for a smaller proportion of trips (e.g., for senior executives only or for flights over eight hours)," the paper continued. "They also expect airlines to make attractive offers to win back premium passengers, and some airlines have said they are reviewing whether to repackage their business cabins minus some of the luxury trappings for a lower price. On short-haul routes, however, there is a firm expectation that travelers will not return to business class."
~ with reporting by David Jonas