First class airline travel. Is it dead? Airlines should expand their brands with premium perks
Aviation companies are continually seeking efficiency and pragmatism, while structurally shifting from being an airline company to a brand relevant in businesses beyond travel.
That means airlines increasingly need to make candid decisions about first class. Some traditional outcomes are already evident: United is doing away with long haul first class, and Lufthansa will not feature it on its forthcoming 777X fleet.
First class attracts outsized attention. It typically generates a low single-digit share of passenger revenue but is used for marketing, since the premium elements of the pointy end deliver a marketing halo effect to the rest of the brand. It is aspirational. But first class passenger numbers are evaporating, as corporate and government travel policies change and business class becomes the new first class. First was often used for frequent flyer redemptions, or complimentary upgrades.
But as airlines extend their brands to become more relevant in daily life, they may need to forgo first class as the ultimate reward and instead deliver experiences and events. Such perks make airlines more omnipresent, allow greater creativity than the confinement of an aircraft cabin, are more exclusive to passengers - and ultimately are cheaper and lower risk for an airline to deliver.
First class has become more important for marketing than revenue
At top-end full service airlines, premium (first and business class) revenue can be of the order of 30-40% of total passenger revenue. The vast majority of this comes from business class. First class typically contributes a low single digit share of total revenue. (Commercially successful airlines should gain the best return per unit of cabin space in premium economy.)
So first class mostly exists not for direct revenue contribution, but for marketing, or the "halo effect" first class has on other cabins and the wider airline brand. The luxury of first class makes the airline and the rest of the plane seem better. Etihad is often now associated with the Residence, which appears only on the A380, of which Etihad has 10. Thus the 10 Residences across all of the Etihad fleet drive more image than the 30,000 other seats across the company.
In a similar way, airlines with special aircraft entrance designs (Qatar Airways' domed ceilings) or other elements (Virgin Atlantic's bar) also attract outsized attention, and elevate the overall perception of the brand.
Revenue first class passengers are decreasing
Although marketing factors have been a reason for the persistence of first class, paid first class passengers have been part of the equation.
But such passenger numbers are typically diminishing. Corporate and government travel policies are changing, and rarely allow first class travel, even for the most senior executives – perhaps only a handful of people in the company/government. This change has intensified, first since the tech bubble burst at the turn of the century and then intensified since the global financial crisis. As bankers feel the cold winds of change this is a trend not expected to reverse.
Hardware: innovation has made today's business class yesterday's first class
It is increasingly difficult to differentiate "first" and "business" class in any significant way, at least on long haul services.
Seating innovation has meant today's typical business class seat is lie-flat, often with direct aisle access, previously the main characteristics of traditional first class. First class seats can be bigger, with greater soft amenities and more exclusive off-aircraft experiences, but on the aircraft itself there is not as clear a divide any more.
At least, that applies to the level of seating comfort, food and IFE. One differentiator is however: space and privacy, qualities much appreciated by those able to access this part of the aircraft.
First class has often been a frequent flyer proposition, but this is losing importance
First class also has a strong frequent flyer component, where first class is aspirational as an upgrade from business class, or to use frequent flyer miles.
Attitudes are changing: most airlines do not have savvy enough IT to select which passengers can access redemption seats. Most airlines open their award inventory, and consequently it is available to everyone, from their top frequent flyers to non-status passengers of a distant partner airline. Airlines would like better control to give preference to their own passengers first, and within that – their more important passengers.
Only SIA's frequent flyers can access long haul premium cabin award seats; Star Alliance frequent flyers cannot. Singapore Airlines also makes extensive use of a "wait list", where passengers express their interest and the airline can selectively approve individual passengers, irrespective of wait list order. This balances revenue management with a measure of how valuable the passenger is, and thus, a decision about who should, or should not, be rewarded.
All of SIA's Star Alliance partners can access economy seats, but not long haul award seats. In comparison, at Cathay Pacific all of the airline's oneworld and non-alliance frequent flyer partners have equal access to first class award seats. The simple mathematics of partnerships means there are more non-Cathay frequent flyers vying for Cathay award availability than there are Cathay frequent flyers.
Asian and European airlines may not have small frequent flyer customer bases but they can be overwhelmed by the volume of frequent flyers coming through their North American partners. Further, North American frequent flyers often accrue miles faster through flying (although this changing,) and especially through credit card promotions.
Often this comes down to a conflict between taking the money - redemption of FF points can be very lucrative, depending on the deals driven by the airline with the sources of the points - and the importance of making seats available to their most important customers.
First class cabins are becoming smaller, and this will continue
Altogether, first class cabins are decreasing in size and will continue to do so. Even Emirates is decreasing the number of first class seats, but is otherwise bucking the trend by persisting with first class. Emirates' low cost base relative to legacy airlines can mean its first class fares are lower than those of competitors. Qatar Airways, which is capturing global interest for its premium position, has first class only on its small A380 fleet; but it has a high quality business class product that would put many other airlines' first class to shame.
Many airlines today have now reduced their first class cabins to two rows. Increasingly that could shrink to just one row (as Singapore Airlines has done on its 777-300ERs). Airlines will evaluate first class and, in the long term, probably do away with it.
At that stage the marketing value of first class seems likely to decrease. Offering fewer seats per plane and putting first class on fewer aircraft means airlines will have very high development costs for seats that are more customised than in business class, and often are unique designs, rather than a customised version of an off-the-shelf seat. Airlines will be unable to spread the development costs out over so many actual seats.
(On the other hand, there will always be a market for an exclusive product and, as fewer airlines offer it, the opportunities for global network airlines like the Gulf carriers to capture a higher proportion of that diminishing market can only grow. Meanwhile though, the other "super-connector", Turkish Airlines, has made a feature of promoting only a - very high quality - business class product.)
Airlines have the opportunity to extend their brand on the ground (it is cheaper, too)
First class is seen as the pinnacle of travel, with some exceptions – such as Etihad's Residence, or invitation-only perks (Qantas' Chairman Lounge), or frequent flyer levels (American Airlines Concierge Key).
In the future, successful airlines cannot focus solely on the flying element of travel. Indeed, they will not be airlines: they will be companies with a high profile flying business that is part of a wider platform that extends the brand to activities well beyond flying and travel. The top reward and greatest aspiration will then move out of the cabin environment and into everyday life. Even conservative Japan Airlines is thinking differently, sponsoring a local techno music festival.
Instead of offering a passenger a first class seat that is replicated hundreds of times a day, there is an opportunity for the top rewards to embrace unique experiences. This could be an evening networking event with senior management, or a half hour in an aircraft simulator.
Yet we are in the very early days of airlines transforming to this new role, instead to becoming a company brand that is part of everyday life.
Connecting to passengers beyond travel is important. It offers an opportunity to differentiate top perks; cabin environments are too confining. And for airlines, besides achieving greater rewards and increasing customer satisfaction, moving away from first class saves money. The first hurdle for them to digest is recognising the need for change.