Buried on page 24 of Cathay Pacific's 2008 results is a single, sobering comment: "Front end collapse." This is not the unfortunate result of a landing gear mishap but an honest admission that first and business class cabins are increasingly lonely places.
The sharp drop in business travel began in September last year following the financial market meltdown. The transatlantic market was the first to suffer. Now, as we move towards the second quarter, the evidence that markets across the globe are suffering in equal and sometimes greater measure is overwhelming.
"It's not quite as bad as air freight, but it's heading that way," says Brian Pearce, IATA's chief economist, comparing the downward lurch of cargo with that of premium demand. Asian carriers, with their large cargo businesses, are feeling the pain on both fronts. Their region, which has prospered as the "workshop" of the world, has seen trade collapse, observes Pearce. International cargo traffic fell by 23% in January, says the Association of Asia Pacific Airlines. This has had a profound effect on business travel. The volume of premium tickets sold in Asia is the weakest globally and the Pacific is hurting too, says Pearce.
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At United Airlines, the "industry-wide decline is hitting hardest in the premium cabin", says chief financial officer Kathryn Mikells. Further evidence of the decline in premium travel on international routes comes from the Airlines Reporting Corp, the US-based clearing house for ticket sales. It says that the volume of international transactions is down by some 14% so far this year, but that their value in dollars is down by almost 30% for the first two months of 2009.
Association of European Airlines secretary general Ulrich Schulte-Strathaus says that "premium traffic passengers are either going to the back of the aircraft or not at all". His member airlines carried 1.3 million fewer premium travellers last year compared to 2007. And while the percentage of premium passengers at AEA carriers has remained constant at 14% of total travellers on long-haul services in the past eight years, the base is declining. The biggest change is in the short-haul market, where premium traffic now makes up just 7.8% of the total compared to 21% in 2000.
Carriers are responding swiftly to the business travel collapse with price cuts that are often steeper than their economy sales. This is one surprising side effect of the crisis on a travel class that was seen as relatively insensitive to price. For example, when did we last see an airline, as Cathay is doing, offering two business class tickets for the price of one?
Another response is simply to lower front end capacity. As it sees demand drop by 10%, with premium falling more than economy, Lufthansa is adding 22 more economy seats at the expense of business ones in its Boeing 747s. Elsewhere, Qatar Airways is axeing the first class lounge on its Airbus A340-600s and adding 44 economy seats. Those few airlines with premium economy cabins, the class in between economy and business, are benefiting as business travellers trade down. "Our premium economy cabins are packed," says Steve Ridgway, chief executive of Virgin Atlantic.
But when markets recover will business class travel rebound as it usually does? Or has the bar been reset at fundamentally lower prices and will business travellers and corporate travel buyers have new expectations?
In the last 15 years the real cost of travel has fallen by 30%, says IATA's Pearce. That is good news for consumers, especially those flying in economy who have benefited from this the most. It is an open question whether those sitting in front of the curtain will feel the impact this time around.
Source: Airline Business
