The Airline Revenue Economics blog argues that there’s a market for international first class, airlines are just selling it wrong. The claim that ‘business has gotten better so there’s not much difference’, he says, is wrong. And there’s a bigger market for the product than there used to be, not a smaller one, for an airline that wanted to approach it the right way.
Airlines have been eliminating or scaling back first class.
- The only U.S. airline that still offers an international first class cabin is American. United dropped theirs as they rolled out a new business, and Delta got rid of its first class decades ago.
- Even British Airways, Lufthansa, and Air France have reduced the size of first class cabins.
- Whether there’ll be a first class at Thai Airways remains in doubt. It’s gone at Asiana, and scaling back heavily at Korean Air. Qantas only has it on their Airbus A380.
- In the Gulf, Qatar Airways has it on the A380 only which doesn’t fly to the U.S. and it’s an older first class without doors (QSuites business class offers less personal space but more privacy). Etihad has been shedding aircraft which had first class, leaving only a handful of planes with the cabin, and its new planes entering the fleet won’t offer first class.
Cathay Pacific First Class
Yet first class really is – or at least can and should be – a differentiated product. Business class may be lie flat and even have doors for privacy, but a lot less personal space, less personal service, inferior food and beverage offerings and a lot more passengers packed into the cabin. First class can be luxurious both in terms of its soft product and spaciousness but also in its privacy.
First class sells the luxury of not being surrounded by so many people, which I find tense – I’m exhausted after flying long haul business class and look forward to getting off the aircraft, while after a long haul first class flight I’m rested and relaxed. It’s genuinely enjoyable.
Singapore Airlines Dom Perignon
So what is the market for this (beyond frequent flyers burning their miles at exceptional value)?
- Oliver Ranson points out that there are more millionaires than ever before, by a wide margin, and first class is a luxury good – and should be marketed as one (focusing on benefits, not features).
- While he points out that billionaires fly private, I’d argue that there’s a middle ground of multimillionaires that might fly private for short haul but where they’d trade down for long haul. Private gets far more expensive for transatlantic, doubly so for transpacific.
- And that’s on top of the limited market for senior executive business travelers flying long haul doing major deals where the airfare is a rounding error and the risk and cost of being at anything other than truly top of game is far greater than the incremental cost of a first class ticket.
The market, then, is long haul between the most major centers of entertainment and commerce. In the U.S. it can be from New York, Los Angeles, and San Francisco, maybe Miami. In Europe it’s London Heathrow and Paris. In Asia it’s Tokyo, Shanghai and Singapore, maybe Sydney. And it’s in the Gulf.
First class is costly because it takes up more space per passenger, because the seats are expensive (and higher maintenance), and because it involves a differentiated service and more staff on board potentially.
But first class is also a revenue generator,
- It adds incremental ticket revenue from those that would buy up
- It adds ticket revenue from competitors by offering a better product high end customers choose
- It adds ticket revenue from those choosing not to fly private
- It helps generate a revenue premium for tickets in other cabins because of the halo affect demonstrating the quality an airline can offer and burnishing its overall reputation – Emirates sees this, it has a great reputation because of an over-the-top first class experience so people choose to fly the brand even though their business class product is inferior.
- Even frequent flyers making once in a lifetime redemptions add value, it may be a loss leader but drives aspirational earning of rewards through cobrand credit cards – which are the single biggest driver of high margin revenue for many airlines, with the cobrand partner being the single largest buyer of travel
Etihad Salmon Biryani
To do this, though, means more than just selling a $100 wine rather than a $30 one – that’s not worth thousands of dollars more. It means selling the difference between being truly relaxed and refreshed after a flight rather than beaten down and muddling through the day even after an overnight in a flat seat. It means selling that air travel is part of the travel experience and part of celebrating life.
Any airline with the resources can buy a large flat seat and pay for good catering. Creating a true lifestyle brand experience creates a moat against competition – the opposite of the commodity mindset that most airlines have adopted. Rather than being unprofitable, first class therefore carries the potential to be the most profitable since it’s the most de-commoditized. And in a world where so few do it, it’s easy to get a head start.
Cathay Pacific Caviar and Balik Salmon
By the way American Airlines could offer a really great international first class product though I do not expect that they will.
Airlines to not care about customers, they never have. They only care about $$$.
All those words which doesn’t change that airlines have boatloads of revenue data and are making decisions based on what they can actually do in the market and not based on theory.
The end of first class began w/ lie flat business class seats. Sure, there is a difference between lie flat business and first class but the incremental difference becomes too small to justify the cost (most companies don’t cover first if they do pay for business) and too expensive for airlines to provide the differentiated product to a relatively small number of customers – which decreases efficiency.
And, despite all of the cries about climate change from the global elite, private jet transportation – which IS substantially different than commercial first class – is growing, limited only by the pilot supply.
I don’t find flying international business class exhausting. And with the exception of the US airlines, I don’t find the business food or drink inferior. In fact, on BA (Do&Co), LH and AF, I think business class F&B is very good. I have tried BA and AF First with last minute buy-ups, and think they are a step or two above busines class, but not dramatically so. To me, the difference is not enough to justify the additional cost, other than as an occasional splurge. Of course, I like the occasional splurge.
I do have clients who will park their private jet and fly commercial if the route has a good F product, so that segment does exist. I just wonder how large it really is.
We have seen top end hotels get away with charging many multiples of what they were charging pre -pandemic for the same product so I wonder if this will migrate to airline fares at the top end.
I don’t have access to the numbers but it seems to me AF’s F strategy is the right one: small cabin size of 4 seats, very targeted routes, and a superior product (both on the ground and in flight), hard to redeem with miles, and most importantly not accessible to non-rev pax.
Eh. I fly FC domestically and business internationally (just not on American carriers). With the exception of Egypt Air, the international carriers still know how to treat customers well.
While there are a lot more millionaires than they used to be, I suspect the vast majority of them are of the’ I didn’t get where I am by financially spending $10K on a plane ticket’ variety. A lot of that group considers themselves to be very middle class with mortgage and children’s college costs and such still to pay for.
Even within business class there is huge differentiation between top players (think QR/BR/etc) and the bottom (think AC/BA/etc)
Even BA first class doesnt come close to QR J. So whats the point of offering F?
I doubt airlines would leave money on the table by cutting out first class. More likely, given the fact they have real data showing them the true numbers, realized they make more money without first class, ancillary benefits and all. Considering the utilization and ability to charge for business class customers more frequently than a first class whale, they probably said quantity is better than quality.
The same thing was said about a la carte pricing, and how airlines that didn’t nickel and dime would get more passengers, yet here we are, with almost all airlines doing exactly that. And we know know they made millions more for it.
Wishful thinking does not mean it actually makes more money.
Personally, I think it’s a shame they are cutting out first class products, but like a la carte pricing, that’s the way its going to be.
I don’t know if that many millionaires can afford to fly first class. I would say these days you would need to be worth 10-20 million before you’re in the category who actually pays for business class, let alone first class. I mean if you’re not your probably better off saving your money and flying coach.
Interesting piece. Theories need to be empirically validated, though. And the data on international first is pretty clear. It is in decline and has been so for 15 years.
Airlines remove it because it generates less incremental profit per sq ft of cabin space than business and premium eco.
This is a good summary piece on the story that is more in line with the data IMO (paywalled):
https://www.economist.com/international/2019/03/09/first-class-air-travel-is-in-decline
Today’s best business class is lie flat seat with aisle access for all. Plus upgraded catering, better service, and lounge access. This product is as good as, if not better than, what first class was 20+ years ago. It’s all semantics – essentially, first class is now called business class.
How does your assertion square up against the fact that the most profitable airlines in the world are all ULCCs, which are effectively only selling the worst form of basic economy?
Exhausted after flying business class because of too many people around? On what, a United 777-200 in 2011?
Biz class is incredibly private these days in the ‘current gen’ configurations.
I do find some of the current gen biz seats to be too hard for comfort, looking at you Delta 767-400, but that’s not because too many people are ‘around.’
The food / beverage is abysmal on too many carriers these days.
I agree with other posters that much of this doesn’t seem to pass either the smell check or the high-level empirical test over the past decade or so:
1) “Millionaires” aren’t what they used to be. You can have $1M in liquid assets and be squarely middle class in most major metro areas. Not likely to shell out $10K for a flight.
2) The folks with the real $ are flying private more than ever – plenty has been written about that over the past 2 years and the trend doesn’t seem to be reversing any time soon.
3) The carriers best positioned to deliver a knockout F product have also largely elevated their J products to be nearly on par with what F traditionally has been. One might then posit that they have cannibalized F revenue, except that…
4) …even a cursory “case math” calculation of square footage utilization on an airplane generally suggests that, for revenue maximization purposes, more J or Y seats are preferable to F – the ratio of revenue from F over other classes is lower than the ratio of square footage needed.
One can’t dismiss the second-order effects outright – e.g. the halo effect and CC spend elements – but it’s tough to intuit that those would be substantial enough factors that couldn’t be overcome by building and selling top-notch J and Y products.
Millionaires by total assets ? If yes, all my friends are millionaires but none fly first class, for that matter not even in business! First class will sell only if business class is mediocre, like Emirates. They are making first class inaccessible to many keeping it exclusive, but that’s coz they are based in Dubai with major $$$$. Many airlines can’t make it work with great business class product.
“ In the U.S. it can be from New York, Los Angeles, and San Francisco, maybe Miami. In Europe it’s London Heathrow and Paris. In Asia it’s Tokyo, Shanghai and Singapore, maybe Sydney. And it’s in the Gulf.”
So that’s American, British Airways, Air France, JAL, ANA, Singapore Airlines, Air China, Qantas, Emirates .
(I’d argue Zürich and Frankfurt because obviously LH Group makes it work, plus Switzerland and Germany are obvious choices here.)
From the list of cities you have, you seem to be saying that *maybe* Delta, United or Qatar are leaving money on the table- but most markets really *aren’t*, you shouldn’t be flying F on Taipei-Seattle or Toronto-Brussels, and the list of airlines flying four cabin F *is mostly right*. There isn’t actually a lot of money being left on the table. Lufthansa has no business flying it on many of their routes. BA should properly be reducing their cabins or using more J/Y+/Y planes because markets like Portland, Atlanta and Denver won’t support it like LA and NY. And so on.
(FWIW, you just consigned Cathay F and Thai F to the dustbin of history. Sic transit gloria mundi.)
Gary, I think you nailed it on this one. First class can be a differentiator in terms of service and “space”, but also a huge revenue driver. I’ve splurged on F on rare occasions (when the difference between J and F is reasonable, especially across the Atlantic with BA and surprisingly Swiss, just have to do less-travelled routes. Once flew Miami – Malaga in Swiss F, even though I was going to Madrid!) but most important, its the value proposition of mile redemptions. Road warrior, and all my miles go toward J/F redemptions (no family, so easier to redeem overall, 1 ticket vs 2/3 tickets), and having airlines have F is a driver in my airline/alliance selection. I really don’t travel Skyteam, because what is the point? AF’s F is closed to everyone, and can’t even use Delta miles for anything above J. It makes me stick to Oneworld and to a lesser degree Star Alliance! Imagine that jaja
Theories…..
People need to fly so we have no choice but when i like to fly, i like my piece to sleep or just be comfortable.
The elimination of First is and always was a business plan. 25 years ago business class was very similar to what premium economy is right now. In the last 10 years, as all the major airlines improved their business class product, going all flat, dine on demand, the need for first class was less. Many times I have flown (pre-Covid) international airlines in first etc., and the first class cabin had less than half of the seats occupied. Obviously the airlines determine that this doesn’t make economic sense.
This is all part of the plan to make the average traveller book up. Make the basic economy seat horrible, so passengers buy economy plus, which is different than PE. On the other hand, International PE was created for business travellers, whose company won’t pay for business class. Very few companies will pay for employees in first class, so the airlines make business class better. See the trend here?
I think the only reason AA put F on the 777-300 is that the crew rest is over top the seats and there are no overheads for the center seats.
Same on CX, lowered ceiling with side bins for you carry on.
Studies done about 10 years ago point to business class generating the highest amount of revenue per sq. ft of seat space. With a lie flat bed, individual compartments, and a door, many of these people aren’t going
shell out 2.5 more when they already have a lie flat bed and good food.
A lot of the first class seats sit empty or are awards. The airlines are more likely to get people to buy business, do a cash upgrade at the airport, or do a cash and mileage upgrade like with American. It’s a better use of space to pack in more business seats which are already very comfortable. Premium airlines can design their cabins and put in business seats with more room and have more space in a lounge area.
There are a lot of new millionaires just from the gain of 401K/IRA portfolios from 2019-2021 and a lot of from those working at FAANGS. The latter tend to be cautious with spending money based on the fatfire sub. They may fly business internationally but that’s it.
Personally, I would like economy eliminated on long haul international flights and replaced with premium economy and business like Singapore does on its longest flight.
@Dominic
> How does your assertion square up against the fact that the most profitable airlines in the world are all ULCCs, which are effectively only selling the worst form of basic economy?
It’s pretty simple: ULLC are great at using meaningless data points. An ULLC takes a $100 airplane, makes $10 in revenues, and earns $2. It then claims they’re the most profitable (20%!! see!!!). A full service airline takes the same $100 plane, makes $20 in revenues, and earns $3. They earning 1.5x times the money that the ULLC did on the equivalent $100 airplane, even though they appear to be less “profitable” (15%!).
You should look on return on assets.
Jackson,
several airlines have recently said that premium economy is now their highest margin product. It requires a whole lot less space per seat than business class, is affordable as a reasonable sellup from more space economy, is easily within what most companies reimburse or is a small enough upgrade that people will pay the difference themselves.
Business class might be the hardest to regain revenue as business travel restarts; high value passengers have figured out how to do their job remotely and will travel again but at lower rates. In contrast, production related workers have to be there in-person.
Most premium economy classes are relatively small but have the potential to grow.
Also, Singapore only has premium economy because the A350 can’t carry close to a full flight in normal configuration so they have gone with a premium economy configuration. As much as people believe otherwise, a couple hundred standard economy passengers often provide as much revenue as a premium cabin. SQ has standard economy cabins on “shorter” use A350s as well as other airplane types. SQ’s A350ULRs operate the longest flights in the world.
The author missed the most important piece about why these cabins will never return to their full glory.
Unions.
Unions destroy airlines.
It’s a case of the tail that wags the dog. For example American has very few international first class seats left and it would be very easy to put on a new hard product
However the most senior Mama flight attendant who may be lazy and not give a shoot and doesn’t care what she looks like will be the one who quickly throws out the food in first class and then sits down and reads her people magazine.
There are amazing senior flight attendants who do an amazing job but in general if we were to go back to a first class model we would need to have a totally separate position that has nothing to do with seniority which is never going to happen stateside or in developed country. Everything has to be approved by the Union and therefore you’re not going to have very good or caring employees in first class; you’re just going to have the most senior.
However in the Asian countries and the Middle East countries it’ll be the complete opposite and therefore they can pull off the product. They don’t care about employee rights and can dictate FA weights and appearances and have them take butler classes, etc.
American airlines could offer Butler classes but unfortunately the union would give it to the most senior person and not to the person with the most skill who has the least amount of absences etc.
@Jake
>It’s pretty simple: ULLC are great at using meaningless data points. An ULLC takes a $100 airplane, makes $10 in revenues, and earns $2. It then claims they’re the most profitable (20%!! see!!!). A full service airline takes the same $100 plane, makes $20 in revenues, and earns $3. They earning 1.5x times the money that the ULLC did on the equivalent $100 airplane, even though they appear to be less “profitable” (15%!).
You should look on return on assets.
According to my Bloomberg Terminal, the RoAs in 2019 (the last “normal year”) are:
Ryanair: 6.9%
Easyjet: 4.6%
Wizz Air: 4.0%
Europe LCC average RoA: 5.2%
IAG: 5.4%
Lufthansa Group: 3.0%
AF-KLM: 1.0%
Europe legacy carrier average: 3.1%
In Europe, LCCs as a group are are clearly outperforming the legacy carriers as a group, and even within the legacy carriers, IAG is the one with full service airlines that are most run like LCCs (I think most would agree that BA and Iberia have much weaker onboard products compared to AF / KLM or Lufthansa / Swiss / Austrian / Brussels). Additionally, the legacy carriers all have LCC arms within them, so if you were to actually compare full service vs LCC on an apples to apples basis, the difference would be even wider.
Similarly in the US for 2019 RoA:
Southwest: 8.8%
Alaska: 6.4%
Spirit: 5.5%
Jetblue: 5.0%
US LCC average: 6.4%
Delta: 7.4%
United: 5.9%
American: 2.8%
US legacy average: 5.4%
While there’s less of a difference between the US legacy vs LCC carriers, LCC is still winning on RoA as well.
Plane Guy nails it: “…… you’re not going to have very good or caring employees in first class; you’re just going to have the most senior.”
Airlines have recognized that it takes a highly engaged, well-trained staff to make 1st Class into a lifestyle worth buying, but even a small batch of rotten apples will drive away your target customers.
I’m amazed that you didn’t mention Covid safety. That is the reason I would strongly consider first class if it wasn’t astronomically expensive. In the past, I was not the first class demographic at all. Always flew economy except for one time when I was bumped up to first class (just Miami to Boston so it wasn’t spectacular at all). But I am VERY afraid of Covid and travel terrifies me now. If I had an option that touted major Covid safety (a lot of privacy and space between passengers for starters, hopefully along with testing requirements, vaccination and boosting requirements, and mask mandates) I would likely be willing to pay a whole lot more than I used to. I know I’m not alone. Travel is a Covid zoo these days. I’ve been avoiding it because there are no mitigation efforts and odds of getting Covid seem exponentially high. You should think about offering a product to someone like me. I would pay for safety. I don’t have unlimited funds by a long shot, but I would pay considerably extra to put my mind at ease re: Covid.