Network carriers are once again pouring millions of dollars into improving their premium cabin product in efforts to elevate business class to new heights

Willie Walsh reclines in his new business class seat, an ice-cold glass of champagne in his hand. How easy it would be to turn this seat into a flat bed and grab some sleep.

But rest is the furthest thing from the mind of the chief executive of British Airways as the flash bulbs pop. This photo-session is the first act of a mid-November day spent launching the carrier's next-generation business class.

The rhetoric around these multi-million dollar investments is always lavish. "In 2000 we revolutionised the industry by introducing the first-ever flat bed in business class," he says. That innovation raised the bar for everyone. But in a "fiercely competitive market" and as customer expectations continue to rise, "now is the time for BA to take a decisive step forward", he says.

Around the same time, similarly lavish parties were being held in Hong Kong and Singapore as Cathay Pacific Airways and Singapore Airlines (SIA) unveiled their next wave of cabin upgrades. Even the US majors, held back by bankruptcy and huge losses since the shock of 9/11, are spending again, hoping to catch up on five years of virtually stagnant cabin innovation.

Pouring the millions needed to revamp aircraft interiors is a tough decision, especially as the time between investments is decreasing. "It is hard to pin down an exact return of investment," explains Andy Severance, manager onboard product planning at American Airlines. The carrier is rolling out its new business class across its Boeing 767-300 fleet, with its 777s joining the programme in 2007.

Part of the analysis focuses on how much an average business-class customer is worth to the carrier and whether they would stay loyal if the product remained the same while others changed. "We ask if we lost one or two customers on every single flight would it be better to put in a new seat?" says Severance. "By the time we've figured this out they've gone and it's too late," says Jim Hadden, manager cabin design at American.

Smart customers

The simple fact is that business-class flyers are demanding more and expecting more. Smart travellers avoid carriers with sub-standard products. To stay ahead the leaders must invest. "We want to be one of the innovators," says Carole Peytavin, vice-president marketing, products and service quality at Air France. The carrier has just put into service its first 777-200 fitted with its new long-haul business-class seat, with a quarter of its fleet boasting the almost lie-flat product by May.

Investing in a premium service is a must for carriers that are committed to the sector. "It is no secret that our premium product is the most profitable part of BA's business today," says Walsh. In 2005, BA saw its premium-class business grow by over 8%. Today first and business class represents 20% of its capacity.

This is not enough for BA. The carrier is increasing the number of its business class seats by 8% as part of the £100 million ($196 million) cabin modernisation. The boost will be achieved by reducing the amount of economy space on 31 of its 747-400s and increasing the number of business class seats from 38 to 52.

"We took the decision to invest in May 2005. Since then we've seen steady growth," says Walsh of BA's business-class revenues. The upgrade is a huge investment, but one that Walsh is confident will pay off. "It is important we have a handsome return - there's no doubt about that."

Calculated risk

SIA is equally confident its S$570 million ($370 million) investment will pay off too. "I have to admit that in every bet in business there will be some risk," says Yap Kim Wah, SIA's senior vice-president, products and services. "Clearly our business is only valuable if we continue to improve but I can assure you we have done our sums. We have calculated the benefits and the risk - the case going forward is a strong one."

One of the driving forces behind SIA's initial timing was the introduction of its new 777-300ERs and Airbus A380s. The first of 19 777s with the new interior entered service in early December. The first A380 delivery has been delayed until October 2007.

The other driving force is customer feedback. Four years ago SIA began a large research exercise, with workshops with frequent fliers held in London, New York and Singapore. "We were looking at the bigger picture - we asked what is it we should do to make travel more pleasant?" says Yap.

"We are all doing the same thing," he says of the research the major network carriers undertake. "But this time around we have done our homework. We have taken the time to do proper research. We listen and we act."

In business class the result is a wide seat at 30in (76.2cm). For comparison, BA's new seat is just over 25in wide, which is still 5in wider than the old one. "Customers told us they want to have their own private space like in their living room when they are watching television or doing work, where they have a sofa," says Yap. SIA's frequent flyers also told the airline they wanted a truly flat bed, all the seats facing forward and direct access to the aisle.

These demanding requirements all take up 25-30% more valuable floor space. "But the good news is we anticipate this product will command a fare increase," says Yap. "All the feedback from our customers is they are willing to pay for these new features."

Air France too will be seeking an extra premium for its new product. "Business-class people are really prepared to pay for comfort and space," says Peytavin. According to Andrew Herdman, director general of the Asia-Pacific Airline Association: "The evidence is that people are prepared to pay a premium, particularly on long-haul flights. They do know the value equation."

SIA is planning on 15-20% fare rises depending on the market so "not all of the increase is passed on to customers", says Yap. In the 777 and A380 the larger business seats mean a one-two-one seating configuration. This compares to the two-three-two in SIA's current 747-400 business class. The 777-300ER will have 42 business seats compared to 49 in its 777-300 currently in service.

"It takes up a lot of floor space, but our designers are clever enough to provide the width and at the same time provide a fully flat bed," says Yap. One spin-off of having so much width is that the seat pitch drops from 76in to only 51in, he says. SIA will closely monitor the performance of the new product before deciding whether to retrofit it to other types.

BA decided to stay with the patented "ying-yang" format of a pod of two seats facing each other. One faces forward the other backwards. "This format is really space efficient," says Neal Stone, BA's design manager. Critically, the design brief was to improve seat width without increasing the footprint of the seat. BA achieved this by reducing the width where a passenger's feet are in full flat bed mode. The new product will be in service in "substantial" numbers in the spring, with the entire roll-out taking 18 months.

US carriers join in

The US majors have watched from the sidelines over the past five to six years as new business-class cabins have entered the market. They have seen their European and Asian competitors stride past them in product quality.

Now they are investing once again, essentially skipping a seat generation. United Airlines has said it will start enhancing its business product during 2007, although few details are available, while Delta Air Lines customers will have to wait until 2008.

American's Severance says the carrier scrutinised the first moves to horizontal lie-flat seats in 2000. While some went fully flat, several others compromised with almost flat seats that did not take up as much space. After 9/11 American was in no state to follow suit. "We didn't feel quite as pressured from the customer standpoint to move right away, and it was probably not prudent given our financial situation," he says.

But American would have moved faster if it could have done so. "Our upgrade timescale of six years historically is a normal timeframe, but it has become a lot shorter," says Severance. "We run very high load factors in business class. This gives us great comfort, but we don't want to be complacent. At some point customers realise you are not investing in the product."

According to Hadden: "On the premium markets that the 777 serves we are relying on the first-class cabin to help support the business-class product." American's sales team structured deals with its best corporate clients to offer easier upgrades to first class and "to make it easier to get people to ride in business class". This has prevented the airline from having to rush the introduction of its new business cabin.

The 767 was American's priority because it does not have a first-class cabin to support the business cabin. But American will not go for a horizontal lie-flat bed. It is not convinced it is an essential ingredient, and it cannot live with the loss of seats such configurations bring. A fully lie-flat seat would mean it losing 10-15% of the 767's business-class capacity, says Severance, with the cabin dropping from 30 to 24 seats. This received a negative reaction in the revenue management department. "It was quite a hit in terms of revenue," he says. "It seems prudent to us we'd be better off with the denser product with good comfort levels. It will definitely put us back in the game."

American will join the 30-40 or so carriers that offer angled lie-flat business-class seats, says Severance. Only around 10 carriers offer fully horizontal lie-flat seats. This puzzles some: "When I looked at our competitors I was surprised at how few companies have absolutely flat beds in business," says BA's Walsh.

Those carriers that do not opt for the horizontal seat say the overall comfort levels offered, plus greater privacy, still ensures a top quality business-class experience. "We all provide different answers because we're all making different choices," says Peytavin of Air France. The carrier is investing €300 million ($400 million) in its current upgrade. "We wanted a very easy living seat: easy to understand, easy to relax and easy to sleep. Our thinking is that a full-flat seat is not always the solution for sleeping."

Whether carriers go for horizontal or angled lie-flat seats, among network carriers a lie-flat solution is now common practice. Some, like BA, SIA and Virgin Atlantic, are already investing in their second-generation business cabins, raising the standards even further in this highly competitive sector. The hope is that the current strength of the business travel market is sustained as carriers recoup their massive outlays.

Chief executive interviews - Read our interview with Willie Walsh of British Airways

Source: Airline Business