Is short-haul business class dead?

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EasyJet's response to the British Airways cabin crew strike was swift. But the additional dose of bad news for chief executive Willie Walsh is that his budget rival was not looking to snatch leisure passengers; it was after BA's coveted gold tier frequent flyers. Initially easyJet lured potential converts with the offer of free "Speedy Boarding Plus", its priority check-in and boarding scheme, when they flashed their gold card on strike days. But the second time round, for passengers flying from London Gatwick, they extended the sweetener to a month's Speedy Boarding pass.

"The reception from BA Gold Card holders was so good we thought it was only right to repeat the offer and to give passengers travelling through Gatwick an extra incentive to carry-on flying with easyJet even after the strike is over. It shows that we, at least, value their business," says easyJet UK general manager Paul Simmons. This is just one example of how low-cost carriers are raising the stakes in the battle for corporate kudos.

A dangerous combination of circumstances threaten to endanger the traditional airline business cabin. On one hand, there is one of the harshest recessions the global economy has ever seen, giving birth to a new generation of cost-conscious business travellers. On the other, there are budget carriers which are keen to give their own bottom lines a boost by relieving traditional airlines of their highest yielding customers. Combined, these factors do not bode well for the front end of the traditional short-haul aircraft.

sas cabin 
 ©SAS
A decade ago corporate travel policies acted as a shield against low-cost carrier defections. But they are now repelling travellers from the business class cabin. Swiss International Air Lines head of sales and marketing, Switzerland, Rudolf Schumacher says: "Demand on short-haul business class clearly dropped in 2009, mainly as a result of the more restrictive corporate travel policies. While on long-haul policies have changed back to business class, they have not yet on short-haul."

For many companies, it is the price, not the airline brand which matters. "Companies are willing to pay a little more to support a preferred carrier but not a whole lot more," says Prashanth Kuchibhotla, director, Advisory Services EMEA for American Express Business Travel. "During bad economic times everyone clamps down on their corporate travel policy. It comes and goes in cycles."

 Have Your Say...

 "I think the future of short-haul business travel is rail, sorry, high speed rail. With continuous, free WiFi, I just can't see how airlines and bothersome airport safety regulations, always in flux, can compete. I think early figures in China do support that."

Dirk, Airline Business Blog response

Meanwhile, demand has dropped, freeing up cheaper third and fourth level economy fares for business travellers. "The spread between what you pay in business and economy was a little too much when the recession hit; companies couldn't justify it anymore," says Kuchibhotla. "Previously, business travellers were not able to get hold of the inventory because it was going so quickly. The crisis meant that they were able to get cheap [economy] fares at short notice. You can't justify a [business] fare which is €468 higher for just a few more features."

And, to make matters worse, IATA is warning of a "steady and structural shift" of business travellers from premium to economy seats. "On short haul markets, we have seen a continued decline over the last decade of passengers on business seats moving to cheaper seats," says IATA chief economist Brian Pearce. "This is because the advantages of full service on short routes are less than the advantages of paying less. I think that's a structural trend that we're likely to see continued. But that is not the case on long-haul routes, where the decline that we've seen in premium and business seems to be cyclical and we're starting to see that come back."

IATA director general Giovanni Bisignani highlights intra-European and domestic North American routes as the areas, adding: "In December last year, when the situation was already recovering and we had some good numbers [elsewhere], we saw European premium traffic was still down by nearly 10%."

It is not only IATA sounding alarm bells about the prospect of fundamental change. Swiss chief executive Harry Hohmeister has talked about "a tangible migration from higher to lower booking classes". Meanwhile, Walsh over at BA was early to vocalise his concerns, saying: "Personally I do not think we will see a full recovery on the short-haul premium market." Like Pearce, he observes "very clear evidence" of a structural shift, meaning that premium short-haul traffic will "never recover to the volumes we saw going into this downturn".

Have Your Say.... 

 "One of the main advantages of mainstream airlines is the option to change schedules on demand. Try changing a Ryanair flight to see how much time is needed and how much it will cost. Having priority in rescheduling is really what I think will guide the airlines."

Marcelo Wuo Lopes, civil engineer Brazil

Figures from the Association of European Airlines throw a sharp focus on the intensity of the decline (see table). Using 2004 as a baseline, it is clear how the decline in intra-European premium passengers numbers has accelerated, ending in a 19% plummet in 2009. Over the period 2005-09 premium passenger numbers fell by a staggering cumulative total of 36.6%. "In one respect, these figures could signal the death knell of premium in Europe," says AEA information manager David Henderson. "Otherwise they simply demonstrate the re-alignment of the market."

Structural Shift

It is easy to see why AEA, IATA, Hohmeister, Walsh and others and are concerned that the change is structural. The same analysis for premium travel beyond Europe shows an 8.9% dip in 2009, but overall the sector grew by 15.6% over the 2005-09 timeframe.

 Have Your Say... 

 "Miles and status are not as important anymore as frequent and fast connections. The only routes I can think of, where a separate business class will still make sense in the future, are those between two large/rich catchment areas with a lot of high-potential business travellers, eg banking, consulting, etc. For the rest, companies probably realised during the last couple of harsh months that business class on short-haul routes is not really necessary for their employees."

Jan Willem Kappes, Cranfield University, UK

Traditional airlines may be licking their wounds, but budget carriers are revelling in the change. Ryanair chief executive Michael O'Leary estimates that 24% of his passengers are travelling for business. "[Short-haul business class] is doomed," says O'Leary. "It's already gone in the US and will be gone in Europe in very short order."

But some beg to differ. BA says the performance of its Club Europe cabin "still warrants us offering it", noting that its customers still value its frequent flyer rewards and lounges. But Walsh accepts that competition will become more intense and customer service will increasingly become a critical issue. "What is important now is the value proposition to customers," he says.

It is not only Walsh who has hit this conclusion. Bisignani says airlines around the world are assessing what actions they need to take to keep pace with the changing market. He explains: "A question many airlines are discussing now is 'what do I have to offer to a business class passenger on a two- or three-hour flight in order to create value for money? Is it different ways to access the aircraft? A really fast track to get in to and out of the airport? What kind services do I offer on board? Telephone, television, Internet? What is it?' Because that is it: that will be the decision. Passengers will return to business class if it represents value for money."

So what can airlines do to add value? Schumacher at Swiss responds: "As airports will get more crowded, one of the main differentiators will be the ground service. Clients will be ready to pay for time gains and that is something airports and airlines alike shall have to work on."

Adding Value

Schumacher adds that it is crucial to enable passengers to turn possible waiting time into productive working time - on board the aircraft, in the lounge and through fast-track airport processing. And, more importantly, he believes there is a future for the business class cabin. "There will be a demand for short-haul business class travel, depending on the level of added value the airline and airports manage to generate for the traveller and, last but not least, what prices are going to be offered in the future for such business class travel."

Airlines have to face the reality that business passengers are likely to remain more price-driven. "On short-haul it is more commoditised than before," says Lufthansa executive vice-president for marketing and sales Thierry Antinori. "I see a good return [in premium traffic levels] in long-haul, but we have to focus on this [short-haul] issue. We can adapt and we continue to offer a value for money [premium product]. But the share of economy will remain very high."

Have Your Say... 

 "For travel up to 90 minutes or so flight time there is no appreciable difference between the budget and traditional airlines. What you want - especially in business - is to get there, on schedule. Seating, drinks, entertainment play absolutely no role for me. There are three real values traditional airlines can add, however: first is their network, second is lounges and the third is you can book a flight one week and be reasonably sure they'll leave the schedule untouched until next week."

Anon, Germany

When it comes to the bottom line, the cabin that passengers travel in is irrelevant: yields are the deciding factor. And, as Henderson from AEA observes, "all anecdotal evidence suggests yields are way, way, way down".

So the debate shifts to revenue management. "There is a mismatch between consumer reality and pricing. There aren't just two prices: one for the front and one for the back," says Henri Courpron, head of aerospace for consultancy firm Seabury. "There are 15 different prices and the odds that the person sitting next to you has paid the same price are highly unlikely." He observes how some people simply will not pay for business class, but will, for example, pay for more legroom. And in the field of ancillary revenues, low-cost carriers are again ahead of the pack.

As well as playing catch-up on charging for extras, traditional airlines are looking to squeeze their revenue management systems still further in a bid to predict behaviour and set prices accordingly. Amex's Kuchibhotla says some are already tapping their analytics to roll out new fare structures, flagging Air France as among "the first out the gate" with a proposition tailored to the "new normal".

New Model

Previously a business class ticket between Paris and Frankfurt came in at €867 ($1,178), compared with a "U Class" economy seat at €399. "Financial controllers were saying we are not willing to pay €468 to get lounge access and a free middle seat," says Kuchibhotla. He explains that Air France has rolled out some "middle ground" fares on the route, preferring to add, say €150, to its bottom line than lose the full €468. "They have moved the curtain to offer a new high-end economy fare class, with some features which business passengers will find attractive."

Have Your Say.... 

 "The main decision driver for business travellers has become price. Within a certain range, not even schedule matters as it did just a few years ago. Flexibility? Yes, a bit, if not overpriced. On board and on the ground product? Nice to have, but not worth the price of a business-class fare. I don't think it will be long until we see most European short-haul become a pure economy class on board." 

Albert Muntane, airline consultant, Spain

For example, the €752 full fare economy ticket has been swapped for three flexible fares at €737, €662 and €549. The cheapest of these is changeable and gives lounge access in Paris or Amsterdam. At just €49 more expensive than the first economy fare which permits changes at €50 per change, passengers may be tempted to trade up. "€399 to €549 is not that big a leap. It gives a few features which are nice to have, but it's still not the full shebang. It costs an airline very little to add lounge access and it is a feature which tempts people to buy up, so why not?"

London City Airport sits right at the heart of the UK capital's financial district, making it a key airport for business travellers. If short-haul business class is going to work anywhere, it's here. But earlier this year Air France-KLM subsidiary and key London City operator CityJet scrapped its business class in favour of a premium-economy product.

"We have done away with classic business class on short-haul," says CityJet chief executive Geoffrey O'Byrne White, who believes that the business class cabin on short-haul is "pretty well" dead. He explains that business passengers are simply looking for flexibility and, more than anything else, to get home as soon as their work is completed.

CityJet's business class fares have been replaced by "CityPlus": a fully-flexible premium economy product which gives passengers priority status, lounge access and doubled frequent flyer points. Passengers are still seated at the front of the aircraft, but the curtain has been replaced with a seat-back marker and the airline no longer guarantees that middle seats will be kept free. Fares are charged at a £20-50 premium over economy and, at its top end, CityPlus will give a 30% saving on business class travel. "I see this as a very practical trade-up proposition for business travellers," says O'Byrne White.

CityJet's experience has shown that a lot of large corporations have switched their travel policy, opting for "the best price on the day", creating difficulties for airline planning. "There's no doubt about it, a lot of corporate travel policies have changed," says O'Byrne White. "The benefits of business class travel have been abandoned by a lot of corporate travel people because it's an obvious target for cutbacks, especially on short-haul travel."

So, as low-cost carriers seek to lure corporate travellers, is the short-haul business cabin dead? Kuchibhotla from Amex responds: "No, I don't think so - airlines might need to re-jig, re-price, re-everything, but it's not dead. You can change the label on it and call it something else, but it's still business."

Is there a future for the short-haul business cabin? Check out other readers' views