Airlines are increasingly looking beyond traditional corporate travellers to fill their premium cabins, as holidaymakers and other leisure passengers become more willing to pay out of pocket for business-class seats and other upgraded travel experiences.
The development is changing the economics of premium air travel, with carriers seeking to capture more revenue from passengers travelling for leisure at a time when business travel has remained largely flat, according to McKinsey & Company.
Steve Saxon, co-leader of McKinsey’s Travel Practice, said the growth in premium cabins was being supported partly by travellers who were prepared to spend more for greater comfort, better food, lounge access and additional space.
Some airlines now generate more than half of their aircraft revenue from premium cabins, despite allocating considerably fewer seats to those sections, Saxon said.
The development gives airlines a stronger incentive to expand and differentiate premium offerings as they seek to improve the economics of each flight.
The significance of the trend goes beyond the price of an individual ticket. Fuel, aircraft ownership and leasing, maintenance, labour and other operating expenses consume a large portion of airline revenue, leaving carriers with relatively thin profit margins per passenger. That makes passengers willing to pay substantially higher fares particularly valuable.
Premium-cabin travellers can therefore contribute disproportionately to the profitability of a flight, even though economy passengers continue to account for most of the seats. The changing profile of premium travellers is becoming increasingly important.
Business class was traditionally dominated by corporate passengers whose employers paid for their travel. The expansion of premium leisure travel means airlines are now trying to persuade individuals to make the same expenditure from their personal income.
The emergence of self-funded premium travellers also presents a challenge.
Corporate travellers may have less incentive to focus on the absolute price of a ticket when their employer is paying. Leisure passengers, by contrast, are spending from their own budgets and are therefore more likely to compare fares, routes and travel dates before upgrading.
That is forcing airlines to become more sophisticated in how they price premium seats.
Passengers who book well in advance, travel in groups or accept connecting flights can be offered lower fares, while travellers requiring a direct flight at short notice can face substantially higher prices.
The objective is to identify what different passengers are willing to pay and capture more revenue without pricing premium seats beyond the market’s willingness to buy.
The rise of leisure passengers is also increasing pressure on airlines to showcase that premium fares offer tangible value.
Better seats, more spacious cabins, improved meals, airport lounges and other services are becoming part of the proposition used to convince holidaymakers to spend more.
For passengers paying with their own money, comfort and convenience must justify the additional expense.
This makes the premium cabin less of a corporate travel perk and increasingly a consumer product that airlines must market directly to individual travellers.
The growth opportunity, however, comes with a capacity constraint.
Airlines cannot simply convert large numbers of economy seats into premium seats without risking weaker demand if the premium market cannot absorb the additional capacity. The commercial challenge is therefore to determine how many passengers are prepared to pay for premium services and the maximum fare they are willing to accept.
