Not many global travellers would consider US airlines leaders in passenger comfort.
From fees for checked luggage to a lack of personal inflight entertainment on long-haul flights, the country’s carriers lag behind most of the globe’s long-haul airlines in providing comforts that passengers want both on the ground and in the air.
“It has been a rather tumultuous decade and the airline sector in general has not been able to invest [in product] as consistently as it would like, ourselves included,” said Jeff Foland, executive vice-president of marketing, technology and strategy at United Airlines, summing up the state of most US airlines in November 2013.
Things have changed.
US airlines have invested more than $4 billion in passenger facing amenities, including airport facilities and onboard product, to make up for their lost decade with more on the way.
“We’ve come through this process [of consolidation] where everybody flies everywhere, with four mega carriers now in the USA,” says Helane Becker, an airline analyst at Cowen. “So airlines go to the next level of competition. That’s attracting the corporate traveller because that’s the high yield that everyone wants.”
Product is how airlines can differentiate themselves when their networks are nearly identical, she says.
Delta Air lines is leading the sector by investing more than $3 billion in everything from new airport lounges to lie-flat business class seats and inflight wi-fi from 2010 to 2013. It announced a $770 million second phase of onboard investments focused on its narrowbody fleet in January 2014.
“There is no question, particularly on the international side of the business, that the investments in the product have continued to rise across the industry,” says Ed Bastian, president of the Atlanta-based carrier. “These are no longer optional investments… It’s part of the cost of doing business.”
The investments generate additional revenue, such as from more opportunities to sell passengers ancillary products or a better seat, and help Delta forge new partnerships, both with other airlines as well as sign new corporate contracts, he says.
Chicago-based United invested $550 million in its onboard product from 2011 to 2013 and is in the midst of a second phase that includes installing new seats on its Boeing 737 and Bombardier CRJ700 fleets, and the addition of inflight wi-fi and streaming entertainment across its entire mainline fleet by the end of 2015.
“A lot of the effort we have right now is so that everything comports to a set of standards that we have set forth with respect to the product,” says Foland.
American Airlines, which is in the process of merging with US Airways, is investing in new cabins on all of its widebody aircraft, improved check-in facilities at airports and standardising the narrowbody cabins between the two operating subsidiaries.
While the Fort Worth, Texas-based carrier declines to comment on the amount of investment, Robert Friedman, then vice-president of marketing at American, told Flightglobal in May 2012 that the interior updates to its Boeing 767-300ER and Boeing 777-200 fleets would cost “hundreds of millions of dollars”.
“Our hope is that by enhancing the products and services, and by renewing and refreshing our fleet we can attract even more high value customers,” he said.
The widebody interior upgrades are currently underway with the first updated 767 entering service on 1 April and the first 777 due sometime in the third quarter.
Southwest Airlines is investing more than $200 million on its new Evolve interiors, inflight connectivity and airport facilities, while JetBlue Airways debuted its first premium product Mint on the New York JFK-Los Angeles route in June.
New York-based JetBlue sees its investments in Mint as a way to win back passengers who fly competitors in transcontinental markets and capture slightly higher-yield travellers who are not bound by corporate contracts, said Jamie Perry, director of product development at the airline, in June. The airline declines to comment on how much it invested in the new cabin.
INVESTMENT PAYOFF?
Delta has reported the most significant headline improvement since its product investment programme began. Operating revenues increased nearly 19% to $37.8 billion and operating profit increased more than 50% to $3.4 billion from 2010 to 2013, the period of its initial $3 billion investment.
Product investments were not the only driver of revenue improvements at the airline. On-time arrivals improved 7.1 percentage points to 84.5% in 2013 compared to 2010, US Department of Transportation (DOT) data shows, and Delta reaped the benefits of having completed its integration with Northwest Airlines in January 2010.
Investments have paid off for Delta in New York. Yield rose 10% in the market on significant growth of the airline’s corporate market share, especially in the banking sector, in 2013, said Bastian in January. He partially attributes this growth to the more than $2 billion investment Delta has made in customer experience, including a new concourse at JFK and renovation at LaGuardia, in the market, he says.
The gains are less clear at other carriers. United saw operating revenues increase just 3.2% to $38.3 billion and operating profit decrease more than 31% to $1.25 billion from 2011 to 2013 – the period of its initial $550 million investment.
However, United has led Delta in generating ancillary revenues. Revenue from product upsells and optional fees increased roughly 40% to more than $2.8 billion at United from 2011 to 2013, according to statements by executives. Some of these revenues were made possible by its product investments, such as installing extra-legroom economy plus seats on its Continental Airlines subsidiary aircraft.
Delta generated only $635 million in ancillary revenue in 2013, up 40% compared to 2012, according to executives.
American just began rolling out product updates on new aircraft, including its Airbus A321s and 777-300ERs in 2013, so the benefits to its bottom line are negligible to date.
However, executives have said that product improvements – especially with the launch of its premium three-class A321 transcontinental in January – have helped it capture more corporate share in the transcontinental, trans-Atlantic and shuttle markets out of New York.
“It’s all being done to attract the business traveller,” says Becker.
Source: Cirium Dashboard
