Up Front Economics
First class is in demand but sales are down because of classic marketing errors
Back in the 80s and 90s British Airways ads used to joke that it was too expensive for your business to NOT fly first class. Like many jokes it contained a grain of truth – flying first, arriving refreshed, sealing the deal and leaving a happy customer sounds much better than losing a client because you are tired and not at your best.
But these days business class offers flat beds and plenty of space to sleep, work or relax. At the same time, the number of first seats offered and sold has clearly fallen – airlines like Air France and China Southern only use one row. Even BA, along with Emirates the world’s largest first operator, cut the number of plush seats from 14 (three to five rows) to eight (two rows) when they installed Club Suite, a business product with doors, on their 777s.
Qatar Airways, who advertise excellent service, have all but abandoned first and offer the Qsuite business class (which I helped develop, see article) instead. Singapore Airlines, another carrier renowned for service, experimented with cabin-like seats on their A380s (see article) but also have a more traditional product on their 777s.
Many industry commentators say that business is now so good that passengers no longer want or need the perks of first. But I disagree. Looking under the hood, I think that what is really going on is that airlines have forgotten how to sell first class and make the classic mistake of promoting features rather than benefits. Read on to find out why…
Why is the revenue contribution of first class important?
When airlines design the best possible LOPA* they start with maximum possible density and only deviate when there is a strong revenue case to do so. This means the base case is all-economy, as few loos and cabin attendant seats as practical, and small galleys.
* LOPA = Layout of Passenger Area, the seat map
When it comes to first class though, it is easy to forget the part about looking for strong revenue cases because both capex and opex are high.
First class suites are so heavy – they weigh 100kg or more against 9kg for a typical economy seat and 6kg for the lightest. This means that first class operators suffer high penalties in respect of fuel burn. The extra weight also constrains the aircraft’s payload-range, which determines how far the aircraft can fly with different passenger complements. Some desirable long-range destinations may be out of scope with suites at the front.
Complex maintenance also has tough implications for opex. The seat’s electric actuators, which generate motion on command, can break. Plush trim and finish like leather and chrome might damage easily and need replacing.
Compounding the matter is high capex – one seat can cost $100,000 or more.
Airlines are often so cost-focused that some meetings between planners and their suppliers might need to be carefully managed to even consider the revenue side. In a busy office with many competing projects it is easy to imagine how other less difficult tasks might take priority.
Even if planners do look at revenue there is a risk of underestimating how much first class can really contribute if the pricing department do not understand or are unsure about how to monetise the willingness to pay of potential deluxe passengers. That would be a shame if it caused an airline to suffer profit-wise in the long term so I have written this article to be an easy-reference starting point.
What is first class in today’s market? It is a time machine
Everything you can see in a first or business class cabin I have outlined in this handy table, which shows how first class features are different from those in business and explains how they benefit a passenger.
While business offers a comfortable journey, first offers a luxurious experience where the passenger has a higher degree of control over how they spend time on the flight. When the flight is over, many passengers travelling in first will enjoy a few hours of more productivity or activities than they would have done if they had flown in business. In this sense, first class is a time machine.
The macroeconomic environment for first class travel is excellent
Billionaires might fly private and people employed by billionaires might fly in comfy business. First class is a service for millionaires. Fortunately for first class operators the number of millionaires is now greater than ever before, with significant increases across each region of the world. Check out the chart from The Economist below, which shows among other things that in China there were hardly any millionaires 20 years ago but now there are more than four million. Due to economic growth, fundamental first class demand is only likely to increase over time.
We know from other industries that wealthy people spend what they have to when they see value. Luxury hotels and expensive restaurants thrive, shiny Apple gadgets fly off the shelves and neither Gucci shoes nor handbags fail to find customers.
The traditional market for first is not just limited to the wealthy though and business travel once almost seemed to be first as standard.
In Europe and the Americas however many businesses clearly state that they do not see value in first class and are concerned that the optics of executives flying in lavish conditions are unfavourable. That does not necessarily mean that they are no longer a market – but it does mean that the airlines are not convincing them to buy.
Meanwhile in Asia and other emerging markets it is still socially acceptable to flaunt status-symbols and first class travel may be the ultimate example of conspicuous consumption. While university researchers in the west often fly economy due to budget constraints, top Chinese scientists are shuttled around the world in first. It is no co-incidence that most of the world’s first class operators are in Asia, which I have shown in the table below along with some airlines who I think would be good candidates for first class.
First class microeconomics covers nine revenue generators
Given the underlying demand for first class that must exist, given macroeconomic conditions, there are nine pathways to revenue generation for airlines.
1. Higher fares: This one is obvious – some passengers are willing to pay more than the business fare and the price gap to private aviation is high. Offering first causes some passengers to voluntarily pay more for their flights.
2. Economy removal: Selling economy seats is easy – you just reduce the fares. Human nature being what it is, the more economy seats there are the more pressure there will be on revenue management to lower bid prices. Unfortunately this approach is not profitable. Offering first removes a natural distraction for an airline’s sales team and allows them to concentrate on more valuable opportunities, boosting revenue across all cabins.
3. Whole network value: Offering first on a limited selection of flights is a common strategy. Qatar Airways operates first to a few destinations on A380 super jumbos (see article) but they only have a few of these. This approach may produce less revenue than not offering first at all because of passengers wishing to connect and the airline completely losing regular first travellers who ‘always’ fly at the front. Having first seats going unsold (or spoiled as we say in the trade) because a passenger wants to travel first all the way or all the time and uses competitors instead harms revenue.
4. Alliance ‘circle’ fares: Each airline alliance has members with first seats and they all offer ‘circle’ fares, like round the world or multi-continent tickets. If one member does not then they may be reducing the value of their alliance membership, which is not cost-free for airlines.
5. The “halo” effect: If something costs ten thousand Dollars is must be good and the things associated with it must be great too. That argument appeals to the primitive part of our brains and it works for airlines too. If passengers see that an airline offers a great first class, they might be more inclined to buy tickets in other cabins expecting that they will be good too. The result is extra demand and revenue in all cabins, not just first, and a potential boost to the airline’s commercial marketplace products (see article).
6. CEO choice: If a CEO flies an airline in first and likes the service a lot, that airline may be well-positioned to sign a corporate contract for a thousand business or premium economy (see this article and this article) seats, which is where they really make their money.
7. Loyalty and upgrades: Some passengers may fly an airline or use a co-branded credit card more often if it enables them to earn the mileage for a “once-in-a-lifetime” redemption worthy of a special occasion. First is more charismatic than business, compounding the impact. Other passengers may be keen on using miles or money to upgrade (see this article and this article), including when their employer pays for business. These effects boost demand and revenue for both business and first class.
8. Mileage liability: Airlines must account for mileage currency as a liability. The more passengers there are who use large stacks of points for first class redemptions, the lower the liabilities become. A small effect perhaps, but still relevant.
9. Multiplier effect: All the above may have “multiplier effects”, for example higher seat sales and higher yields together increase revenue by more than the sum of each.
How to market first class
The prosperous do not seem to trade down when it comes to other products and services – I do not see why they would they do so in air travel? First class was worthwhile for airlines in the 1990s, when there were fewer millionaires, lower stock market returns and fewer successful businesses, and the product was not as good as it is today (see article) – I do not see why it should not be so today. Taking a look at the marketing data in the table below, it looks like airlines are doing a poor job of marketing the front cabin.
Source: Brand web sites in Feb-22
What strikes me about this table is how the three luxury non-airline brands are much more aspirational and philosophical in their language. They are selling a lifestyle (benefits) rather than a product (features). Although the airlines’ language is flowery it is much more matter of fact – suites, lounges, menus, bedding, spas, all features not benefits which any sales pro will tell you is a mistake. I believe that if airlines marketed their first class as a lifestyle brand that also happens to be a time machine (see above) they would be much more successful.
Successful first class pricing can be counter-intuitive
The rule of thumb I follow for inter-cabin upgrade pricing is that each step roughly doubles the fare received by the airline, although not necessarily the sticker fare. So for example an airline might receive £500 for economy, £1,000 for premium economy, £2,000 for business and £4,000 for first.
But many business class passengers do not pay the sticker fare – the buyer gets a discount either at the time of purchase or at the end of the year. This might be because their employer has a contract with the airline but there are also some wealthy families in cities like Hong Kong who are known to have deals too. When passengers travel in a group or on an inclusive tour there might not even be a sticker price.
Such discounts are rarer in first as the smaller cabin does not facilitate the volumes required for the airline to take an interest. Corporate policies limit discounts up-front too and while a CXO might travel in first at their contract rate most managers will only be allowed to fly business. Significant discounting in business class has some surprising implications for successful pricing in first.
First class sticker fares can be cheaper than business:
Set business class fares at £5,000 and first class fares at £4,000 – if the expected discount is 50% in business and 0% in first the airline will receive £2,500 for business and £4,000 for first, which is about right given the difference in the seats. This strategy works well if business class demand to come (see article) is high.
Sell first by inflating business prices:
Set business class fares at £3,800 and first class fares at £4,000. Many passengers who will buy a business class ticket anyway but have some control over their travel (successful small business owners for example) will pay the extra £200 for first, think they got a great deal and be more likely to travel in the highest cabin in the future, boosting lifetime value. This strategy works well when business class demand to come is low but travellers own their budgets and willingness to pay is high. It might also work well with passengers redeeming miles on some routes.
Offer special first class fares to smaller businesses rather than larger ones:
Many airlines have a scheme for small businesses – when I was at Qatar Airways we had Qbiz. Nowadays my company is a member of On Business, the American Airlines, BA and Iberia programme. Corporate customers may have contracts and high travel budgets, but their travellers are not buyers. At a small business on the other hand the decision-maker may be the traveller. It makes sense for airlines to offer first class as a treat to SME customers – “enjoy the fruits of your success” or a similar tagline would work well – and the SME programme is the perfect channel to make this happen.
Bundle first class with ticket flexibility
Sometimes a business class ticket that upgrades to first class for free is a compelling reason to fly on an airline, even if another is cheaper. The reason is that business travellers can expense the business class fare to a customer, who never actually sees that the traveller actually flew in first. BA used to do this a lot. The catch was that you needed to buy a relatively expensive ticket with flexible conditions for change and refund. This approach is great for airlines because it gets people to voluntarily pay more, even if a cheaper fare is available.
If you sell first class seats or any other cabin product, or if you are an airline wanting to make your first class more successful, reach out to me to help you achieve your goals.
oliver AT ransonpricing DOT com