Via Financial Times

Airlines around the world have been rushing to add premium economy seats to their long-haul aircraft as it overtakes business as the most profitable class on a per square foot basis at some of the world’s top carriers.

The premium economy cabin typically offers wider seats with more legroom than standard economy, as well as more perks such as a welcome drink, larger in-flight TV screens and a slightly posher meal. 

For this added comfort, airlines are able to charge as much as 80 per cent more than an economy ticket for a product that takes up only slightly more space and does not cost the carrier much more to produce. 

“Premium economy is quite a cash cow for the airlines,” said Ben Bettell of Counterpoint Market Intelligence, an aerospace consulting company.

First introduced by Taiwanese EVA Air and Britain’s Virgin Atlantic in the early 1990s, premium economy has soared in popularity over the past decade on long international flights with 36 airlines now offering the cabin.

In June, German airline group Lufthansa said the class is its most productive cabin, which it introduced in 2014. The carrier said revenues per square foot are 6 per cent higher than in business class and 33 per cent higher than in economy. 

British Airways, which launched its premium economy cabin in 2000, has long said the class is almost as profitable as its business offering on its long-haul flights. 

In the past two years, the big US carriers, American Airlines, Delta and United have started introducing premium economy cabins across their long-haul, wide-body fleet, while Dubai-based Emirates plans to roll out its first premium economy cabin in late 2020. 

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Aviation analysts expect growth to continue. Counterpoint Market Intelligence this week forecast a compound annual growth rate for premium economy of 9 per cent between 2020 to 2028 in its aircraft interiors report. This is up from about 5 per cent over the past four years.

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“I think that any major airline that doesn’t have it now is looking at it very seriously because it becomes a competitive issue,” said Brendan Sobie, a Singapore-based aviation consultant.

The demand for premium economy has increased partly in response to the growing divergence between an economy class that has become increasingly cramped and a business class that has become much more luxurious, taking on much of the opulent features of first class with offerings of fully flat beds to fine wines.

Daniel Roeska, aviation analyst at Bernstein, noted that premium economy today is comparable to what was offered in business class 15 years ago.

John Strickland, a London-based aviation consultant, said: “Its emergence came from the hypothesis that some business travellers stuck in economy would be willing to pay a premium for a little more space, privacy and better catering. In addition, some leisure customers would upgrade for the same reasons.”

Others say the financial crisis of late-2008 also played a part in its growing popularity. 

Christophe Renard, vice-president at CWT Solutions Group, which manages business travel on behalf of companies, said offering premium economy was a way of easing losses due to travellers downgrading from business to economy as they sought to tighten their belts.

“It’s a good alternative to business class for those companies looking to reduce their travel spend,” he added, noting that some corporates now have a “premium economy only” travel policy. 

Some analysts say the move is part of a general trend of airlines moving away from the old model of having first, business and economy class to looking much more closely at the best way of generating profit per unit of space.

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“Airlines are getting smarter about what their customers want. I think you are going to get even more product segmentation,” said Mark Manduca, aviation analyst at Citi. 

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However, in spite of this, some carriers have been slow to introduce the cabin class.

Mr Strickland noted that the worry for many airlines has been that if they offer premium economy, then business class customers might trade down, sacrificing highly profitable margins. So far, this largely has not happened. 

Tim Clark, president of Emirates Airlines, said this concern was carefully considered before the carrier developed its premium economy offering. 

“Before we made the decision, we did a lot of careful modelling and review, as to how it would complement our existing product mix, which customer segments it would serve, how we would introduce it into our fleet and systems, and so on. It’s important to us that Emirates’ premium economy is a quality proposition that would not dilute our business class offering,” he said. 

In the US, the big carriers have finally recognised the appeal of premium economy.

Lori Ranson, a US-based analyst at the Centre for Aviation, Capa, believes US carriers “needed to get their respective balance sheets in order and achieve a certain level of financial sustainability before they could invest back into the business.”

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Like their European rivals, they are bullish on the prospects for the class. Executives at American said the average fare for its premium economy product is twice the coach, or economy, fare, “making it the most profitable use of square footage on our widebody aircraft”. 

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United, the last to enter the segment behind American and Delta, so far has about 70 of its 114 widebody aircraft fitted with its premium economy cabin. On average, the carrier plans to add one aircraft with the new product every 10 days from now through 2020.

Bob Schumacher, United’s managing director of sales in the UK and Ireland, admitted US airlines have been slower to adopt the new cabin class. He said United has taken a “measured” approach, waiting to see where there was demand. 

Some of United’s largest corporate customers have said “we need this product” so they can offer different travel options to different grades of staff. 

Meanwhile, some people who use business for work often do not “want to throw themselves to the back of the aircraft” when they travel for leisure. 

“What we do know, is there is a demand curve. If we don’t offer it, we miss out,” said Mr Schumacher.