In for the long stretch
Today's battle in the air is at the front end of the aircraft, as airlines upgrade their premium offers to sell more profitable seats, says Andrea Li
The unrelenting growth of Asian economies is pushing passengers towards the front of the plane, with businesses still willing to pay a premium for their staff to travel in comfort, at a time when business travellers in Europe and the United States are cutting budgets and flying more frugally.
'Asian airlines are at the leading edge when it comes to upgrading their premium products. The profitability of these airlines means they are in a better position to improve their hardware with more regularity. Their younger fleets also allow them the opportunity to create new products,' said Brendan Sorbie, a senior analyst at the Centre for Asia Pacific Aviation.
'American and European aircraft are typically two to three generations behind Asian ones, and by the time they have caught up, Asian airlines have moved on to the carriers of tomorrow,' Sorbie said.
Many full service carriers in the region have, in recent years, focused on their premium business: All Nippon Airways upgraded its long-haul business class cabin; Singapore Airlines introduced private cabins for first-class passengers; Cathay Pacific launched new business class seats; and more recently, Hong Kong Airlines launched its all-business class flight to London's Gatwick airport.
'The intercontinental routes are where all the international airlines compete, and where you see a convergence, and need to be competitive in the front-end market,' said Andrew Herdman, director general of the Association of Asia Pacific Airlines.
The arrival of low-cost Asian carriers such as Air Asia and Jet Star has further pushed full service carriers down the premium route, pressuring them to make a decision on whether to focus on the front or back end of the plane.
'Many full-service carriers have chosen to improve on their premium product, because they were not able to compete with low-cost carriers due to their high-cost structure,' Sorbie said.
There is also greater potential for profitability in the premium market. The yield on business-class tickets, measured by average ticket price per kilometre flown, is three to four times that of economy class, while first class is five to eight times that of economy. In short, first and business class accounted for less than 10 per cent of passengers, but generated almost 30 per cent of the total revenue, Herdman said.
But the return on these cabins is only worthwhile if the carriers are able to successfully sell a significant portion of the seats, and not fill them through upgrade or redemption. This could be a real challenge, Herdman said, particularly as business-class passengers tended to book late and change their flights at short notice.
If any market has the likelihood of leveraging upon the premium segment, however, it is Asia, where the number of high-net-worth individuals ('HNWIs' in the jargon) willing to pay more for business-class seats whether for business or leisure, is on the rise. The region saw a 9.7 per cent increase in its HNWI population, surpassing Europe for the first time, to reach 3.3 million HNWIs in 2010, according to the latest global wealth report by Capgemini and Merrill Lynch Wealth Management.
Michael Benz, head of Merrill Lynch Wealth Management in Asia Pacific, said: 'Asia Pacific remains a region of enormous wealth creation spearheaded by China, India and Japan, which continues to outpace global levels.'
With the battle lines clearly drawn, airlines operating long-haul routes are pulling out all stops to retain existing passengers and attract new flyers. Andrew Orchard, an analyst at the Royal Bank of Scotland Group, said: 'What you can provide in the air is somewhat limited. Competition has now extended to integrating the whole travel experience, from picking you up in a limousine to delivering you to your hotel at the other end.'
Business class passengers now automatically expect flat beds, multi-channel flat screen TVs and extra space, so, to make their mark, airlines are having to be more innovative and make improvements on the quality of services across the board, from faster booking and check-in to bigger and better lounges, and consistent service both on the ground and in the air. The Dubai-based Emirates Airline, for example, has installed showers on its A380 aircrafts for first-class passengers. Air France now offers food by the Michelin three-star chef Alain Ducasse at its first-class lounge in Paris. British Airways offers an Elemis travel spa for first and business-class passengers in London and New York.
Indeed, the business class product has evolved so much that airlines are making it difficult to distinguish the product from first class.
'It is becoming increasingly hard to maintain a first class cabin as demand is small, efficiency low and the cost is very high,' Herdman said. 'Business class has been upgraded to the point of being what first class used to be, so in today's market, first class is a super-luxury segment, competing more with private corporate jets.'
The more prestigious premium cabins have also widened the gap between the front and back of the plane, generating a need for a new market segment: the premium economy cabin, for passengers who demand more, but are not necessarily able (or willing) to pay business class fares.
The concept is not new; British Airways, Virgin Atlantic, and Taiwan's EVA Airways have offered premium economy for some time. But recent years have seen the likes of Japan's ANA, JAL, Air New Zealand, Air France, and more recently, Cathay Pacific, enter the premium economy market.
Alex McGowan, general manager, product, at Cathay Pacific Airways, said: 'There is absolutely room for a value-conscious segment who is prepared to pay a little more to get a great deal more space and comfort.
'We expect to win new customers to our premium economy cabins, as well as upgrade some passengers who pay for higher fare and flexible economy tickets. Exact numbers and percentages remain to be seen but we believe we have a very competitive offer.'
At the Association of Asia Pacific Airlines, Herdman says: 'In Asia, consumers do have the best range of choices on a variety of prices and models in air travel. It's here where airlines really are offering different propositions. The challenge for Asian airlines is to continue to be innovative and launch new products ahead of others.'
Business class fares to London (Approximate - includes surcharges and fees)
Cathay Pacific: HK$74,439
Thai Airways: HK$31,445
Hong Kong Airlines: HK$47,590
British Airways: HK$43,058
Air New Zealand: HK$41,689