Premium Economics - Part 2
When it comes to premium economy, only recently have Emirates aircraft offered the fourth cabin. But Tim Clark has been impressed. He told CAPA, a news service, “we have been absolutely shocked at the [high] demand for the seats” and almost all other longhaul airlines are on record with similar remarks. So why is premium economy so popular? Let’s take a look.
This is the second of two articles about premium economy, which I shall call “premium” for convenience. Two days ago we busted five myths about the cabin – check out the article here.
Benefits that put profits in airlines’ pockets
As any sales professional will say, it is much easier to help a customer select a product when you focus on the benefits, not just the features. For example, when Apple first marketed the iPod they did not say that it had one gigabyte of capacity for MP3 music files – they said “1,000 songs in your pocket”.
Airlines that clearly explain the benefits of premium to their passengers will find it easier to upsell bookings into the cabin, helping increase revenue and profitability as customers voluntarily pay more. So to begin I have made this handy table breaking down the typical features of premium economy and explaining how they benefit a passenger.
Success ingredient 1: These benefits are easy to understand and explain, unlike for example the more nuanced benefits of first class over business (more on that another time). No wonder airlines have been successful offering them to passengers.
Flying premium doesn’t make the plane go faster, it just feels that way
In some markets flying premium is a status symbol. For example social media is awash with people posting selfies in Comfort +, the shorthaul premium cabin of US airline Delta. Offer such passengers a good fare with clearly explained benefits and many will be happy to pay more for a flight.
But in other markets many people see it as irresponsible to be seen spending more money than necessary, which I call the “culture of humbleness”. Many passengers targeted by Vistara, who operate premium in India, would fall into this category. In these cases airlines like Vistara successfully inspire people to upgrade by presenting the benefits of premium in ways that benefit other people, not just the passenger.
For example, having more space in premium makes it easier to work, helping the passenger’s boss. And a bigger meal in premium could mean that the passenger need not eat on arriving home so can spend more time playing with their children before bed time.
Success ingredient 2: Even in “price sensitive” markets, airline sales teams can still move premium seats.
Spill and spoil in the premium cabin
From a revenue manager’s perspective there are three types of passengers travelling in premium:
1. Those who would have otherwise travelled economy, paying more for their flights
2. Those who would have otherwise travelled business, paying less for their flights
3. Those who would have otherwise flown a competitor, paying something rather than nothing
If an airline does not have enough premium seats revenue is lost, or spilled in airline lingo, as passengers fly in economy or with a competitor. But if an airline has too many premium seats they are unlikely to be sold, or in airline terms spoiled, a cost which can be reduced but not eliminated if the airline overbooks economy and upgrades.
Similarly, if premium economy is “too good”, business class beds will be in less demand, spilling revenue away from plusher cabins. The current wide-body set up with good legroom and wide cushions probably has little scope for improvement.
Success ingredient 3: Since applying standard principles to the premium cabin is not too hard, revenue managers can work it for success.
For another discussion of spill and spoil, check out this article.
Premium pricing strategy recommendations
A good pricing strategy for premium contains four ingredients.
1. A high fare that will always be available whenever there are seats left for sale and can be discounted on corporate contracts, the target market – such a fare would normally be “fully flexible”, meaning that the passenger can change to another flight without significant change fees if their meeting plans change
2. Fares that can be upgraded to business class in exchange for air miles – I would normally recommend that all fares should be upgradable (with availability constrained by inventory controls) because persuading passengers to pay part in points and part in money is never bad for cash flow
3. A wide range of fares that can be tailored to the demand for a particular flight
4. A simple upgrade structure from economy fares, for example the prevailing economy fare plus $100, valid whenever premium seats would otherwise be expected to go unsold.
A dynamic pricing process called “dual RBD validation” is perfect for 3 and 4 of these. More on that another time.
Success ingredient 4: The existing pricing infrastructure is perfectly equipped to price premium seats – when coupled with strong demand, no wonder this cabin makes a profit.