(Bloomberg Businessweek) — For decades, ferrying tourists to vacation destinations has helped major airlines cover basic costs, but the front of the plane is where they’ve racked up the bulk of their profits.
So when the pandemic whacked business travel, carriers were left looking for another way to pad the bottom line. Increasingly they’re finding it in premium economy, where travelers can avoid the cattle-car aesthetics of coach without spending thousands of dollars for the expansive digs of business class. And with Covid-19, growing numbers of leisure travelers are willing to splash out for a bit of extra elbow room at fares that are frequently more than double the cheapest economy seats. “People are desperate to take charge of their lives now, and airlines can no longer force them into just one or two categories,” says Juha Jarvinen, chief commercial officer at Virgin Atlantic Airways Ltd., which pioneered the service in 1992.
The trend was already on an upswing before the pandemic, with installations of premium economy seats—not including the “plus” sections of coach, which offer extra legroom—growing 5% annually in the three years before the coronavirus hit. Researcher Counterpoint Market Intelligence predicts that pace will accelerate as more carriers embrace the idea of a separate cabin on long-haul flights featuring slightly wider seats, several extra inches of legroom, a deeper recline, bigger screens, and marginally better food and drink.
The three largest U.S. carriers—American, United, and Delta—have been installing the class across their widebody fleets. Emirates introduced its first premium economy offering this year on some Airbus SE A380 double-deckers and plans to add it to 777X planes on order from Boeing Co. Finnair Oyj, which specializes in flights linking Europe with East Asia via its Helsinki hub, next year will start adding the service on all 27 of its widebodies. “The investment has been an easy decision for us,” says Topi Manner, Finnair’s chief executive officer. “Premium economy is the most profitable real estate on the aircraft, and the pandemic is reinforcing that.”
Seats in the premium cabin occupy barely 10% more space than coach, whereas a business-class berth typically requires three times as much room. Deutsche Lufthansa AG says premium economy generates 33% more revenue per square foot than economy and 6% more than business—and is 40% more profitable than the latter because it’s cheaper to install. The German carrier has premium economy cabins on all 102 of its long-haul aircraft and is considering stripping out more business-class seats to expand the sections. Initially, Lufthansa was concerned that the service would cannibalize its business bookings, but most passengers upgrade from coach. “Premium economy is the area we’re focusing on the most,” says Heike Birlenbach, head of customer experience.
Some in the industry caution that the cost could be an issue for airlines just recovering from the financial devastation of the pandemic. A premium seat costs $8,000 to $20,000, a fraction of the $75,000 to $250,000 price tag for a lie-flat pod in business class. But it’s still about five times what carriers pay for a coach berth, and Quentin Munier, strategy chief at seat-maker Safran SA, says some carriers are struggling to scrape together the funds needed to make the change. “Many are in wait-and-see mode,” he says.
Lufthansa Technik, a unit of the German carrier that specializes in cabin makeovers, says it’s had several inquiries from other airlines about adding premium economy and shrinking business—with some Asian carriers considering eliminating business class altogether. And it takes only about five days to install the berths and rewire the cabin, says Niels Dose, product sales manager with Lufthansa Technik. “It’s a pretty simple engineering operation,” he says.
Today’s premium economy is similar to the business class that airlines introduced in the 1970s—a marginal increase in comfort at a substantial increase in price. But carriers in recent years have deemphasized first class, making business the key differentiator for their brands, with lie-flat seats and sumptuous service. A recent design study envisions flat berths in premium, though carriers haven’t jumped at the idea. Surveys show the most important feature of business class is the ability to get a good night’s sleep on red-eye flights, so such an offering would likely spur more business passengers to take a step down rather than encourage coach-class flyers to upgrade, says Ben Bettell, a consultant with Counterpoint. That means for the foreseeable future, aside from a few extra inches of space, the principal appeal of premium economy may still be that warm, fuzzy feeling you get when you know you’re not sitting in the worst seat on the plane. “Premium economy offers an affordable escape out of economy,” Bettell says, “and perhaps more importantly an opportunity for coach passengers to improve their status.” —With Tara Patel and Julie Johnsson, Zainab Fattah, and Mary Schlangenstein
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