The disappearance of the highest yielding passengers presents a severe dilemma for many carriers which, like British Airways and Singapore Airlines (SIA), are investing heavily in improved first class products. Others are following Virgin Atlantic and Air Canada by dumping first class in favour of an enhanced business class product which equals (or betters) first class brands.
The premium travel product is constantly evolving for the simple reason that its customers account for around one-third of total passengers and generate two-thirds of total revenue. The first class market remains an important niche for many carriers and can generate 12-15% of total sales from just 5% of available capacity. But, for others, the expense of differentiating first and business brands no longer makes sense when the former is filled with upgraded passengers and staff.
Long-term declineThe anecdotal evidence is that the first class market has proved to be more resilient than standard business and hybrid executive classes, from which many corporations are forcing executives to trade down to economy on shorter sectors (see next page). However, there is little question that first class is in long-term decline. "The introduction of good business class products 10 years ago has satisfied the demand in business but made the market for first much smaller," says Chris Allin, brand manager first at British Airways.
The first class market can be divided into two categories. There is a small segment of celebrities, government officials and the plain rich who will only travel first for cultural reasons. Vanity precludes travel in the business cabin and carriers which move to a two-class service know they are cutting themselves out of this small niche. The balance, around 85%, are usually corporate executives who are prepared to pay for the superior services and differentiation offered in some first class cabins.
The bulk of the existing first class market is discretionary and value is playing an increasing role in their travel decisions. "There is a continuing polarisation in the market," says Paul Griffiths, executive director commercial at Virgin Atlantic. "There will always be a core of first class passengers who will travel on certain airlines for the image. But the number prepared to pay is [falling]."
From its launch, Virgin pioneered the two class configuration on long-haul services with first class service at business class prices. It has tapped into a corporate market unwilling to pay the average premium of 50% for first class service. Air Canada, Alitalia, Continental, Delta and Sabena are among a host of carriers to have followed suit after finding first class to be unsustainable.
Pockets of resilient demand remain on dozens of sectors from business centres such as London, New York and Los Angeles and the Middle East. Europe and North America have always been stronger first class markets than Asia, though the latter is catching up despite the financial crisis on the region.
The shrinkage of first class is stark. By 1998, just 4% of long-haul seats were used for first class compared with 10% in 1993, according to data from Boeing. Less than half of all 777s have more than two rows of first class seats. Moreover, the extra room has not all been dedicated to business class, where the share of seating has fallen from 20% to 14% since 1993. Airlines have been adapting to the long-term decline in premium traffic by allocating the same space on aircraft but reducing the total number of seats.
However, first class yields have held up better than in business class. Average longhaul ticket prices in first class climbed 4.8% in the 12 months to 30 June, 1998, according to a survey by American Express Corporate Services. Business class fares dipped in the first half of the year and rose just 2.7% year-on-year while full economy fares fell by 9.7% over the same period.
Polarised marketThe premium market is polarising into those carriers which are persisting with three or more classes and those which are moving to two classes with the premium cabin upgraded to first class standards. "There are probably half a dozen airlines which can justify first class on a revenue basis," says Rupert Duchesne, vice-president marketing at Air Canada. A few carriers offer little differentiation between first and business class and generate little yield pick-up between the two.
Duchesne says that Canada has traditionally been a weak first class market but the introduction of its Executive First product in 1994 still faced a lot of internal resistance. The move was a competitive response to BA's Club World and boosted premium revenues by 16% in the first year and 26% in the next. Moreover, recent research indicates that a return to an "ordinary" business class product would wipe 10% from the carrier's 51% share of club class traffic to Europe.
Retaining a three-class configuration ultimately comes down to maximising the revenue per square metre in the aircraft, and improvements in business class have made it more difficult to justify the cost of first class. "Business-class has come on in leaps and bounds making the differentiation of the first product much more difficult," says Allin. "So we had to change the definition of what first class should be."
BA established an industry benchmark three years ago with its £70 million ($120 million) first class refit. This cut capacity from 18 to 14 seats and offered individual cabin-style spaces for passengers and fully reclining sleeper beds. While less than affectionately referred to as 'coffins' within the business, the configuration clearly differentiated first from BA's Club World business class and provided the range of services which first class passengers expect.
The combination of flat sleeper seats and individual space is being followed by carriers like Lufthansa and SIA. The latter relaunched first class on selected routes in October as part of a S$500 million ($310 million) fleet revamp of all three classes after a two-year survey of 4,000 passengers. Yap Kim Wah, SIA's senior vice-president marketing services, says first and business class markets remain very distinct with the latter focused on routes to Europe and North America. He says that the first class changes were driven by the need for exclusivity and included a reduction in the number of seats from 16 to 12 to avoid upgrades. "Passengers need to be assured that all others in first class are full-fare paying," he says.
In a few markets like the Middle East, first class remains a lucrative business. "There would be an outcry if we dropped it,"says Tim Clark, commercial director at Emirates. The Dubai-based carrier earns 18% of passenger revenues on intra-Gulf routes from first class, yet it takes up just 6% of capacity. On European flights, 14% of sales come from first class.
The future of the surviving first class products will be driven by three factors: continuing demand on some (but not all) long-haul flights; the brand enhancement which first class can bring; and the potential for future product innovation. While Emirates derives a clear yield boost from first, Clark believes the benefits spread wider within the airline. "The first class brand drives the rest of the product. You benchmark yourself against it," he says.
The clear implication is that carriers which choose to dump first for an executive class risk diluting their premium brand. However, this argument only applies if the demand was there in the first place. "We were not a major player in first," says Rachel Richards, intercontinental project manager at Delta, which plans to dump first on all long-haul flights from January 1999. "We were at the stage where we would have had to invest time and money in a real first class. It just did not make sense." Richards says so far there has been no resistance from former first class customers switching over to the new executive class.
The third option is for carriers to match first class availability to demand. "We are going to see first class get better and we are going to see it disappear," says Dan Olason, Boeing's regional director for product marketing in Asia. Olason sees airlines opting for a mix of two and three class configurations within their long-haul fleet and points to carriers such as Air-India and Eva Air which have persisted with four classes, adding a premium economy to first and business. Then there are carriers like Emirates which offers first class to Europe and within the Gulf but only two classes to Asia and the Indian subcontinent.
Ultra long-haul debateThe debate over retaining first class or segmenting the premium market in other ways has been accelerated by the advent of ultra long-haul equipment like the 777-200X and the Airbus A340-500. With flight times of 16h or even 18h around the corner there is clearly a potential to offer a differentiated product involving everything from proper beds in the cargo hold or overhead areas, to in-flight gyms. While the push has come from the manufacturers, airlines are uneasy about going back to a three-class configuration with beds for some and super-J products for others. "Segmentation within business class is not an avenue we want to go down," says Griffiths at Virgin.
The shrinking gap between first and business has also limited what airlines can do with ground services for first class passengers. Priority check-in, lounges and limousines have become standard fare in both cabins. These services also form the bedrock of most carriers' alliance strategies with equal access for partners' passengers. But alliances have yet to come to terms with meeting the aspirations of those who demand first class. Air Canada and SAS are alone within Star in not offering three classes. Duchesne concedes that it will probably lose some custom. "We have decided across Star that it does not make sense for us to reintroduce first."
Ever-improving business classes could still be the death of first class. Airlines can only go so far in turning cabins into luxury hotels and it will not be long before sleeper beds and cabins appear in business class.
A survey on BA's website found that 28% of respondents saw first class as their ideal flying experience, just ahead of sitting near a celebrity but behind visiting the cockpit. High praise indeed.
Source: Airline Business
