Is business-class travel going extinct? Part 1 of 2

In times of economic uncertainty, business travel decreases as organizations slash travel budgets. The International Air Transport Assn. is already reporting that business and first-class travel have experienced the biggest plunge in five years. Promising all-business class airlines like MaxJet, Eos and Silverjet have gone out of business in just a matter of months. Other airlines are cutting capacity too, as fuel costs rise. So what does this mean for the future of business travel? Is it going extinct, or is it here to stay? Let’s analyze this from two perspectives: business class-only airlines, and full service airlines with specific all-business routes.

All-business class airlines: Verdict – Going Extinct

The all-business model was always considered an experiment and at record high oil prices any new model struggles. Aviation analysts point to the premium-class graveyard where the tombstones are reminders of such short-lived U.S. airlines as Air One, Air Atlanta, McClain, Regent, MGM Grand and Legend. Most of these offered domestic US routes only, which re-affirms the point that there is little domestic market for all-business carriers.

Guerrilla warfare
MaxJet, Eos and Silverjet all operated trans-Atlantic routes as well as some between London and Dubai. Not only is this one of the most traveled business segment, it is one where customers have an over-abundance of choice. A business traveler can choose to travel by Business or First class on a plethora of full-service airlines. And this is the threat that premium carriers knew all too well, and often suffered from it. Most recently, American Airlines retaliated last year by launching a service to Stansted from New York JFK, putting it in more direct competition with Eos and Maxjet, both of which linked Stansted with JFK.

Another crucial factor is that with deep pockets, full-service carriers are able to sustain a loss-making route much longer than premium carriers can, since the latter can’t dig into other sources of revenue. In fact, both Eos and SilverJet folded when a prospective investor pulled back.

Loyalty Matters
Yet another reason premium airlines have trouble competing with big airlines’ business- and first-class products is because the big airlines offer more frequent flights to more cities and have the high-end customer addicted to their frequent-flier programs. Hence, switching to a premium carrier incurs an opportunity cost for the traveler in terms of lost “miles” and status. Premium airlines should tie up with full-service airlines such that frequent fliers can choose between the two services and still earn miles. La’Avion, which flies all-business between Paris and New York, has tied up with British Airways’ Open Skies to do just the same. Smart thinking.

Hence, unless premium airlines are willing to think innovatively on ways to increase passenger numbers, the future looks bleak for them.

———–

The next article in this series will evaluate whether business-class travel in general will survive or go extinct.

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Shashank Nigam

Shashank Nigam

Shashank Nigam is the CEO of SimpliFlying and a globally sought-after consultant, speaker and thought-leader on airline branding and customer engagement strategy. He is also the youngest winner of the Global Brand Leadership Award and has addressed senior aviation executives globally, from Chile to Canada and from Sydney to San Francisco. Shashank's perspectives have found their way into major media outlets, including CNN Travel, CNBC, MSNBC, Bloomberg UTV, Mashable and in leading publications like Airline Business, ATW, Aviation Week, and others. Shashank studied Information Systems Management and Business Management at Singapore Management University and Carnegie Mellon University. Hailing from India, he splits his time between Singapore and Vancouver, among other cities.
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Showing 5 comments
  • David L. Lamb, ITC
    Reply

    Question: Is Business Class travel going extinct?
    Answer: NO.
    Question: Is Business Class travel changing?
    Answer: YES
    Question: Is the “Business Only” airline a viable concept?
    Answer: MAYBE.

    In order to address these points, we really must examine the crux of the issue of Business Class at this particular point in time: The world economies are in recession. A deep one. A consequence of that is greater spending on telemarketing and less spending on business travel. Since a vast majority of the revenue from Business Class (over 90%) comes from corporate travel, one could make the argument that absent that business, is the Business Class product a dinosaur? My answer would be no, since historically, if we look at these events as “cycles”, business travel will return and will return in force when the economy rebounds in different parts of the world. As long as the world demands that business be done in person across a table instead of over a business screen (which it will for the foreseeable future, Business Class will not be going away.

    Is Business Class changing: YES.

    However, now is the time for airlines to retool and bring their Business Class products to a competitive standard, especially US airlines. All US airlines are severely lacking in their Business Class offerings compared to their European and Asian counterparts and to a large degree, this has been due to the fact that the airline recession in the United States is really an airline depression. However, as cycles come around, US airlines will be able to leverage their domestic lift against their international corporate business in order to keep a good portion of that traffic. Alliance agreements in this respect help them out enormously.

    Carriers like Singapore Airlines are going all out to capture the high end passenger; their A380 suites in First Class and their Business Class pod seats with all the room they provide those customers lead the way in terms of the product. However, I question such a dramatic upgrade when only a 180 degree flat seat will do. The new seating product that Swiss is installing in their Business Class (from Thompson) is I believe the future of Business Class: The ability to provide maximum comfort to the passenger while being able to increase the efficiency of the cabin space used to provide the product is the critical answer to the question of the viability of Business Class.

    In terms of the passenger, two types of passengers really exist: There is the corporate road warrior who will drop $8-10,000 USD for a round trip Business Class ticket to Europe. As a rule, we like those guys, since they tend to return and fly often and they keep the yield high. There are times of the year, however, that they don’t fill every seat in the cabin. Airlines are trying to develop a second kind of customer: The leisure Business Class flyer. In some markets (principally US-Europe), there are restricted inventory Business Class fares that average between $2900-3800 USD, but they have such steep restrictions that they are impossible to use except for leisure travel. Some people believe that the development of this passenger will dilute yield in the Business Class cabin. I’m not one of them. If you can get the road warrior to fill 80% of your seats,why not fill the extra 20% that might go empty with leisure customers that will pay $4000 to fly in Business Class. The market exists, I know it does, as this was a key strategy to fill out our Business Class cabin on my flight sector. It is an effective strategy, so long as the allocation is strict and would not displace higher yield revenue.

    Question: Is the Business Class airline a viable concept?
    Answer: Maybe.

    Here’s the “maybe”. I believe airlines that elect to offer an all business class product in a market in which there is the traffic to support such an operation without diluting the yield on their other flights, I believe THAT concept to be quite viable. This is the example of Lufthansa/Privatair utilizing B737BBJ and A319CJ on stage lengths of 4000nm or so. It is exclusive, the product can be more easily catered, as it is catered once for the entire cabin. Both Swiss and Lufthansa have been very successful at their transatlantic operations and as they take on their own equipment, I believe they will start operating the aircraft themselves rather than subcontracting the service out.

    What I do not believe is successful is the concept of an “all Business Class airline”. Unfortunately, the airline business is a numbers game. It is also a balancing act. Balancing low yield high volume against high yield low volume traffic to achieve the maximum RASM per seat is the entire premise of revenue management. In a one cabin high yield environment, the only lever that is available is price. However, costs don’t go down,as there are a fixed number of seats per flight and with no option to have a higher density lower cost to get the dollars flowing, those airlines will be completely as the mercy of the vaguerities of the market.

    They were also victims of the competitive advantage of the mega airlines that had the ability to leverage their schedule, their nonstop flights, there “all business” services. At Lufthansa, if the flight doens’t do well, they pull it. At EOS, if the flight doesn’t do well, then the entire airline is at risk.
    As much as I believe there is a market for an all business class flight operation, it is only viable within the context of a much larger airline operation that can absorb the hit if the flights don’t perform by simply removing them from service. However, as both Swiss and Lufthansa have proven, as long as you can offer a choice, and a product that is high quality, passengers will come. To be certain, filling an A319CJ with all high yield Business Class traffic is a much more profitable operation than filling the same number of seats on a 747 and then having to fill the rest with economy class to break even.

    So what about “Open Skies”? The BA product offering a Business/Premium Economy product across the North Atlantic) is operating 757-200ERs to the east coast of the US from Paris and soon from other cities ex Europe (except the UK). Does this operation have the kind of product blend to be able to survive? My answer is YES. If BA’s Open Skies pulls Business Class traffic onto its own flights, there are fewer passengers that are having to transit Heathrow. This opens up BA seats on their transatlantic flights for LHR-East Coast USA traffic in which the yield in Business Class is very high. By increasing the amount of O&D London traffic and forcing the beyond traffic onto Open Skies, BA should be able to increase the yield per seat without sacrficing too much in the way of traffic.

    Of course, the wild card is Virgin Atlantic. If VA can take LHR-USA business away from BA ex London, then OpenSkies might actually hurt BA.

    But of course, the whole Virgin/BA story is one for another day.

    For now, let us believe there is hope for Business Class, as long as the product is high quality and is space efficient, then the ability of a mega airline like Lufthansa to continue to expand its Business only product is enhanced.

    However, Business Class only is a dead horse. With three airlines entering the NYC-STN market and all of them going under within two years of their startup, even before the economy went sideways is testament to the fact that the concept doesn’t work, especially in markets in which the competition can simply add lift/lower the price and kill you….which is what happened to EOS, Maxjet and Silverjet.

    Lesson learned.

    Cheers from Seattle,
    Dave

    • Shashank Nigam
      Reply

      @Dave: Brilliant analysis! I absolutely agree that Business Class is here to stay, and US airlines need to buck up very soon, or they’ll be left behind when the economy recovers. Also, I like the way you analyzed the LH/LX model of business aviation. It’s something that ANA has successfully followed as well.

      OpenSkies is a very interesting situation altogether…it’s the only surviving all-business class airline. And it works because of the fact you mentioned – flying direct to points in EU while skipping LHR. So they’re effectively competing with AF-KLM for now, and not so much BA. Though, I hear that their load-factors have been below 50% lately. I wonder what’s BA’s threshold limit to sustain OpenSkies before deciding to shut it down. Though, I personally feel that it’s a different airline, with a passionate and thinking CEO (Dale Moss) and it should be able to defy the trend we saw with MaxJet etc.

  • Matt
    Reply

    I can get all business travel details in this blog and additional info about it.. I have been looking for a blog like this for past many months.. The points mentioned in this article are valid..
    Business Travel Web

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