At a time of “Occupying Wall Street,” type of protests seen around the world, it is interesting timing to take a look how airlines are creating a larger difference between low class (economy), upper class (first/business class) and middle class (economy plus).
Many American airlines have been suffering since 9/11, but have more recently started making profit again. Others have also been distracted with mergers (America West & US Airways, Delta & Northwest and still United & Continental), which has left many premium products (especially domestic ones) aging. Recently, airlines have started putting money into their premium products, while cutting options on economy, but why? I think there are a few reasons:
* Premium products, especially internationally, are very profitable
Scott Mayerowitz writing for the AP points out that, “first-class and business-class passengers make up only 8 percent of international travelers but account for 27 percent of revenue.” Why wouldn’t an airline go for where the money is at? At the end of the day, airlines are a business and they are meant to make profit. Now that they have money to make investments into products, does it not make sense to give passengers what they want? The wealthy want a better product and most of the non-wealthy want cheaper tickets.
* Legacy carriers need to keep their frequent fliers
Newer airlines, like Virgin America, have been shaking things up with-in the US. They provide superior first class and economy product and might make some of the frequent fliers on legacy carriers think twice. Take away points and rewards and what would you rather fly? On an old MD-80 aircraft (still flown by American and Delta) or a newer cabin on Virgin America’s new Airbus A320s?
* It is cheaper to keep a current customer versus the money to get a new one
It is basic Business 101. Companies will spend much more money trying to attract new customers than just trying to keep the ones they already have. It makes long-term financial sense to improve first class.
* Rich people want nice things, less rich want to get there as cheap as possible
It comes down to market demand. Those that do not have the money, normally want to get from point A to point B as cheap as possible. When comparing prices, they might see that it will cost $20 more for one airline, but would rather save that $20 (or $80 if a family of four) for their trip. However, this doesn’t stop the person from complaining about the lack of service and amenities.
Those that can afford the extra costs or have earned enough rewards to be upgraded, care more about the amenities offered. They are more willing to shell out some extra money for a higher level of service.
As Mayerowitz points out, “Most of the 3.4 million Americans expected to fly this holiday week won’t get anything close to that treatment. They’ve paid a little under $400 for their round-trip tickets. And it’s a cutthroat business. To save $5, passengers are likely to choose another airline.”
* There are some things given to economy, but most cost money
Just because economy passengers are not seeing the royal treatment, doesn’t mean they are not getting anything. Many airlines have been installing Wi-Fi onto their planes and are offering some pretty decent food options — but you have to pay for both. This allows airlines to offer rock bottom prices and additional add-ons that passengers can pay more to increase their level of service. This seems to be working for most airlines, since they are making record profits on the additional options in economy.
* The middle class now have an option
Flying used to be just for the rich. Then just for the rich and middle class. Now, almost anyone can snag a cheap ticket and flying is open to the masses. You have the rich up front, the non-rich in the back and now some airlines are offering premium economy options for the middle class. Delta , JetBlue, Frontier, United and Virgin America all offer premium economy seats, but is the extra cost worth it? I guess it depends on who you are and how long your flight might be.
Edward Russell, with NYCAviation.com, recently took a look at the different options and if they are worth it.
I have been flown around the world in many airline’s premium products and have loved them. However, they would have cost me anywhere from $5,000 to $10,000 if I would have paid out of pocket — that is not even first class. When I am flying on my own dime, there is no way I could ever come close to afford that and mostly I am looking for the cheapest fare.
If one can consistently afford a premium product, I can understand getting spoiled and demanding a high-level of service. But for most of us, we are happy with getting to our destination as cheaply as possible. “They want their luggage. They want to arrive on time. They want the airplane to be clean,” Andrew Nocella, US Airways senior vice president of marketing explained to the AP. “Most importantly, they want a low fare.”
Airlines know that many people in economy just care about the low fare and that people who can afford a better experience care about amenities. If airlines are just giving passengers what they want, why do so many people always seem upset at them? Oh that’s right. Many people want to pay economy level prices, but get that first class treatment. I doubt we will be seeing that anytime soon.
Here’s what you have to keep in mind… airline management for at least the last 10-15 years view their business as a commodities game i.e. when the plane leaves the gate with an empty seat that service (commodity) can never be recovered. It is an entire shift in how airlines were run. Gordon Bethune wrote about wanting a plane 80% full with $800 fares than 100% full with $600 fares. Look around the industry and ask yourself do the Smiseks, Parkers and Kellys have the same view? Airlines operate on a shoestring profit margin. Post 9-11 they have taken from employees (bankruptcy and contracts), creditors (bankruptcies) and stock holders (diluting share prices and various grades of stock) in order (in some cases) to stay afloat. Those wells are dry. What you are seeing now is a shift to the consumer (in my opinion where it should have been all along) for cash flow and profits.
Very nice article to articulate the need and right from different airline customer sectors, as the most challenging industry, facing so many obstacles in the last century, human/nature disasters, the tax, the labor, the fuel cost., etc, airlines overall are standing on their feet, the leverage point now is to make some profit, and satisfy majority of customers, they manage it with discipline, as customers, we also need understand, it’s the industry too crucial to fail, beyond connecting the dots (people & thing), it’s connecting the world. thanks.
David, That picture of Singapore’s first class suite reminds me of a roomette in a streamlined Pullman car.
When I worked for an airline years ago…I used to upgrade to First Class a few times a month when AVAILABLE, but as a pass rider today…none of us can’t even upgrade to FC anymore due to many FF’s upgrading at the last minute before departure, oversold flights AND too many RJ clunkers (that still flying on MAINLINE ROUTES that has no business flying that route anyways). Yeah, that’s revenue (with surcharge fee collected to redeem).