Social Spaces Are Revenue Generators

How do lounges & bars onboard aircraft generate revenue for airlines?

The opening scene of Quentin Tarantino’s ninth movie Once Upon a Time in Hollywood sets the scene quickly. An air stewardess is climbing the signature spiral staircase of a jumbo Boeing 747 airliner. Upstairs some guys and girls are getting their groove on in a funky bubble lounge. It’s the 1960s – the era of free love, almost-free fuel and the dawn of the jet age.

Looking back to aviation in the 60s it seems like a different world, even in first class. There were super-size recliners but no flat beds (see article). The cabin was filled with vibrant primary colours – reds, yellows and blues. They captured the excitement of the era but were not very relaxing. Perhaps they were not meant to be.

There might have been a film projected onto a screen at the front of the cabin but the pneumatic headphones supplied by the carrier were certainly not noise cancelling. There were trolleys laden with beef ribs and lobsters, and free-flowing gin martinis, whiskey and cognacs at lunchtime. Fares were stratospheric.

And if you were on the 747 there would be a lounge upstairs.

Each airline used it’s own distinctive design for the lounge. Australian flag-carrier Qantas had a Captain Cook theme, complete with ship’s wheel.

North American carrier United went for a flower power theme.

US flag-carrier Pan Am had model clippers (the ships which famously carried tea from Asia to Europe at high speed) because they branded some of their early aircraft clippers too.

BOAC (UK), Continental (US) and JAL (Japan) were all in on the action too (in that order, below).

Lounges in the 1960s made a lot of sense. The new 747 jetliners were so big airlines doubted they could sell all the space. Many passengers had until recently been familiar with ocean liner travel, where relaxing in a lounge was a well-known part of the experience. The space upstairs on early 747 was quite small compared to the 747-400 and 747-8’s long upper decks. Back then it really was the bubble.

American Airlines even offered a lounge for their economy class passengers.

This made sense in the context of the times. All plane tickets were expensive in those days and many economy class jetliner passengers would have been first class ocean liner travellers.

Having a lounge on the plane would have reassured them that air travel was just as good as going by sea, allowing the airline to capture share from the ocean-going market. Many such travellers may even have expected a lounge.

Fast-forward to the present and such a world seems hard to imagine. When airlines decide how many seats to put on their planes, the basic principle is to start with maximum density and only deviate when there is a strong revenue case to do so. Today’s first and business class travellers are ensconced in comfy suites that offer space, privacy and comfort to sleep, work or relax.

Yet some airlines still offer lounges and social spaces.

Virgin Atlantic has offered a bar for as long as I can remember. This one below would have been flying in the late 1990s or early 2000s – the seat behind it is the J2000, a glorious amalgamation of purple and chrome that would have been truly ahead of it’s time if their rival British Airways had not introduced Club World with a fully flat bed at the same time.

Today the bar is still a Virgin Atlantic signature. Their 787 cocktail centre features three cool metallic seats and a jaunty angle.

Even James Bond got in the action with his friend Mathis during the 2008 guns-n-gadgets spectacular Quantum of Solace.

Ian Fleming’s James Bond of the books would have experienced the original airliner lounge on the Boeing Stratocruiser too.

The super-modern A350 that Virgin Atlantic operate is a little different though. It has a space they call the loft with a fancy sofa (right hand side in the photo below) and the booth with a little table so two passengers can share a drink, a snack or a game of cards (left hand side).

The booth is not an entirely new concept. Qatar Airways had a little table between two seats in a lounge on their A340s back around 15 years ago. Certified for four passengers, it was a bit tight at full capacity – one person either side was better.

Unfortunately the middle eastern carrier’s lounge was a commercial disaster. It took up enough space for four first class or 12 business class seats but nobody used it. The reason was that the airline restricted it for first class passengers and since there were only eight of them on the plane the chance that anybody would like to hang out there were slim.

Eventually the lounge was withdrawn from service, business class was brought forward to occupy the space and about 40 new economy class seats were installed behind door 2 instead.

Qatar Airways learnt from their mistake though. When they revealed their A380 lounge in 2014 it was available for both first and business class.

I had to good fortune to play a small part in developing this product. We designed a special cocktail and canape service so that people hanging out on the sofas at the side could enjoy something interesting during their flight.

It was quite a heavy interiors product – the chandeliers feature real copper for example – and putting it towards the back of the plane helped with weight-and-balance to offset the heavy first class suites at the front. Being not quite at the back (there were some economy class rows behind it) it did not weigh down the plane at the tail end.

Emirates, another middle eastern airline, also has a bar on it’s A380s. They also have special cocktails and capapes for the space. There is attractive lighting (the lamps are reminiscent of the Qantas Captain Cook lounge) including LED representations of the iconic Burj Al Arab hotel and Palm Jumeirah, which clearly represent Dubai.

That’s the pretty pictures over with. Now on to the economics. Read on to find out how social spaces generate revenue for airlines…

[I don’t own any of the images in this article. If you do, I am hoping you are cool with me using them to tell this story  – please let me know if not and I will take them down]

I built a business case analysing the Qatar Airways A380 lounge and comparing it with the A340 failure to see how A380 could be more successful. Any airline can do the same - it needs six ingredients:

1. The number of seats (normally economy class) and amount of galley space that must be sacrificed to make room – the “displacement cost”

2. A statement of the value-added services that the lounge or bar will deliver to passengers

3. Mechanics showing how the value-added services will translate into ticket sales

4. Revenue economics leading to a valuation of ticket sales based on volume and average fares

5. Quantitative comparison of the revenue benefits of ticket sales against the revenue cost of removing seats and galley space

6. Compare all against the cost of lounge vs. non-lounge options to calculate profitability.

The seats and galley space that have to be removed to make room for a social space depend on exactly where in the aircraft the social space is located. On the early 747s the bubble was arguably never intended to carry passengers – it was there to have a few seats for crew and staff on the aircraft’s freighter option.

That made the 1960s lounges ‘free’ from a revenue perspective. Fuel burn costs were limited due to cheap oil so all the airline paid for was the design, product and maintenance.

The Emirates A380 bar is situated at the back of the upper deck. Possibly four or five rows of economy class or a few rows of business class could have been installed. The Emirates A380 (pre-premium economy) already has 90 premium seats (first and business class) and 399 economy class seats. Any more would have to be sold at an incredibly low price compared to the average, if they were sold at all. From that sense the “displacement cost” of the Emirates product was probably low.

The Qantas A380 also has a small social space at the front of the upper deck, which would otherwise be used for lavatories. The displacement cost here is probably negligible too.

Virgin Atlantic’s bars, loft and booth do not take up too much space either. On the A350 the loft is at door 2 and is so elegantly designed that it probably takes away no seats at all. The 787’s bar might displace one business class seat.

There could be potential for Virgin Atlantic to add a few trolleys and standard units in another galley replacing the social space. But the airline does not have any flights over 6,000 miles – Hong Kong is the longest at 5,994 miles – so there should be enough food and drink to go around with a standard number of galley units.

The Qatar Airways A340 lounge on the other hand took up space for about five rows of eight-abreast economy – 40 seats. The aircraft were large but not as large as the A380 – around 240 economy class seats with the lounge vs. 399 (60.2%) on the Emirates A380. The A340s were used on busy, slot-constrained and high-yield routes like London Heathrow, Paris Charles de Gaulle and Washington Dulles so putting in more seats made sense revenue-wise.

One reason the Qatar Airways A340 lounge failed but the Emirates and Virgin Atlantic spaces are successful is that the Qatar Airways displacement cost was too high.

Another reason was that there were no special services. Everything in the lounge was available to passengers at their first class seats. There was nothing to surprise and delight them, or make them think ‘wow! I have to go to the lounge’.

On Virgin Atlantic though the bar is actively marketed as a fabulous experience. They even served James Bond his famous “Vesper”:

Three measures of Gordon’s Gin…

…One of vodka…

…Half a measure of Kina Lillet (which the steward reminds us is not Vermouth)…

…Shaken well until it is ice cold…

…And served with a large, thin slice of lemon peel…

…six of them!

Of course passengers want to visit the bar on Virgin Atlantic.

The presence of the bar translates into ticket sales because it is great advertising for the airline. Emirates has given it’s bar prominence in many campaigns. Premium cabin passengers imagine that they might use the bar, leading to more interest and higher demand for seats. Economy passengers imagine that an airline with a bar in business class stands a good chance of being amazing in economy too, so they are interested in buying tickets as well.

To calculate the revenue impact and compare it against the displacement cost, there are five relevant effects. Long-term readers will remember that these are similar to the revenue benefits of branded lounges at airports (see article).

Demand effect:

The amazing social space influences some people’s decision to fly on an airline – offering the cool lounges help sell some business and first class seats that would otherwise go unsold (or be ‘spoiled’ as we say in the revenue department).

Loyalty effect:

Some people who love the lounges and the bars will be loyal to the airline, even if they do not always fly first or business class, or on planes with the flagship interiors. Demand for other flights, cabins and the airline’s co-brand credit card will be higher across different routes and market segments.

Fare level effect:

Some people may pay an extra $10 or $20 to be on a flight with a lounge, increasing the airline’s pricing power (reducing ‘spill’ costs as we say in the trade).

Revenue management effect:

The demand and loyalty effects will not only help sell some seats that would otherwise go unsold, the airline’s revenue management system will automatically monetise the higher demand even more by increasing the prices for some seats through reducing the number of seats available at lower fares, (a process called assortment optimisation, which can also be considered a reduction in ‘spill’ costs).

Multiplier effect:

Higher demand, more loyalty, boosted fares and more seats being sold at higher prices means that the whole of these effects is greater than the sum of their parts. I call this difference the multiplier effect.

So there you have it folks. That’s how onboard lounges and social spaces generate revenue. Want to know more? Send me an e-mail.

oliver AT ransonpricing DOT com