All-premium operations have generated a great deal of attention but remain a relatively small niche. Do they have a rosy future?
The launch of four all-premium carriers within the last two years has captured the attention of airline executives around the world and stirred debate over whether their new business models could upset the economics of legacy operators. But while growth in the new all-premium sector has been steady, by no means has it been explosive. The sector remains relatively tiny, with only 20 aircraft operating today, and so far there has been little to no impact on legacy carriers.
The all-premium sector, however, could be on the cusp of significant growth that would expand it well beyond its small current niche and into the mainstream. British Airways and Virgin Atlantic recently revealed bold plans to enter the market next year with potentially large fleets of aircraft in all-premium configuration.
"It's encouraging to see they believe they need to launch with critical mass," says PrivatAir chief executive Greg Thomas. "I've been telling my airline customers for years they need to scale up. We've passed the trial phase and they should be scaling up."
Geneva-based PrivatAir has been operating Airbus A319LRs and Boeing Business Jets (BBJs) for Lufthansa since 2002, and BBJs for KLM and Swiss since 2005. But these three European legacy carriers have been slow to expand their pioneering all-premium operations, and currently only wet-lease a total of five aircraft from PrivatAir with no commitments for additional aircraft.
But the launch of all-premium operations by BA and Virgin, along with opportunities made possible by European Union-US Open Skies, could prompt the trio and some of the four all-premium start-ups to accelerate expansion plans. Legacy carriers which have long studied all-premium concepts but not taken the plunge may also be persuaded to enter the fray. The result could be a flood of new aircraft in all-premium configurations.
"It has the potential to be the next big thing," says Boeing Capital managing director capital markets development Kostya Zolotusky. "If it does become the next big thing it will clearly disrupt business models."
But it is far from certain that the market is ready for such an explosion. For example, BA and Virgin have cited Zurich-New York as a potential all-premium route, but can this relatively small market support three operators? The six Swiss BBJ flights per week from Zurich to Newark are "very profitable" with load factors currently averaging 80%, says UK country manager and former marketing chief Gregor Koncilja. The market may be big enough to support a second daily frequency, which Swiss is considering, but could become oversaturated with three or four frequencies.
"We'll do our utmost to show who the national carrier is," says Koncilja. "We'll of course protect our hub."
He adds Swiss will have a big advantage over new entrants because it has strong customer loyalty in Switzerland and large corporate accounts with local companies. For similar reasons sister carrier Lufthansa is not concerned about the prospect of BA and Virgin launching all-premium flights in the Frankfurt-New York market. Lufthansa vice-president sales and services Europe Karsten Benz points out BA and Virgin cannot match the connections Lufthansa has in Frankfurt and unless they operate multiple frequencies, they will not give business passengers the flexibility they require. "It's a challenge to operate a small frequency operation out of a hub of another carrier," Benz says.
Lufthansa will add a fourth daily flight in the Frankfurt-New York market in October when it begins using a PrivatAir BBJ to operate a new early morning frequency to Newark alongside three existing daily widebody flights in standard three-class configuration to JFK. Lufthansa and PrivatAir pioneered the all-premium concept five years ago when they launched an all-premium service from Dusseldorf to Newark. The following year all-premium services were added from Dusseldorf to Chicago and from Munich to Newark - the latter will be dropped in October and replaced with an Airbus A330 in three-class configuration. Benz says "the potential is there" to launch all-premium flights in several other transatlantic markets, "but these markets are definitely smaller than London-New York".
Only a few key business routes such as London-New York, which averages about 1 million premium passengers per year, may be able to sustain multiple all-premium operators. Of the 20 aircraft operating today in all-premium configuration, nearly half are already dedicated to the London-New York route.
Eos now operates three flights on most weekdays and will add a fourth in September. Silverjet added a second daily flight in July. The third all-premium carrier in the market, Maxjet, plans to stick to just one daily flight but has been quicker to diversify its route network. While Eos and Silverjet only serve the one route, Maxjet now serves London from Las Vegas and Washington with Los Angeles to be added in August.
Silverjet chief executive Lawrence Hunt claims there is still plenty of room for growth in the London-New York market because the three all-premium start-ups combined have so far added only a few hundred seats per day in a 7,000-seat market. Silverjet's load factors have improved every month since its January launch and in June reached 70%. Maxjet and Eos, both of which launched in late 2005, claim their load factors are averaging above 75%.
Fortunately for Eos, Maxjet and Silverjet, BA and Virgin are not planning to operate all-premium services from London. BA and Virgin, which respectively operate 10 and six daily flights in normal configuration between London and New York, barely noticed the launch of the three start-ups.
"I don't believe there's been any material impact," says BA chief executive Willie Walsh. Virgin director of external affairs and route development Barry Humphreys agrees: "We haven't seen any impact at all. At the moment our [premium cabin] load factor is at record levels."
Walsh and Humphreys say their new transatlantic operations will connect continental Europe with US destinations. But they have not yet decided on exact routes, launch dates or a configuration. PrivatAir's Thomas predicts BA and Virgin will opt not to go with an all-business product as generally expected, but a two-class configuration with business and premium economy.
Virgin successfully pioneered premium economy on long-haul routes in the 1990s and BA followed in 2000. Premium economy now accounts for about 11% of all seats in the London-New York market but is not offered in any US-continental Europe markets. Offering premium economy alongside business class would lower the risk for BA and Virgin and "gets them back in their comfort zone", Thomas explains.
"Fundamentally, there are lots of markets that can support 50- or 60-seat all-business class aircraft," says Thomas. "The key is whether the airlines are ready to take the risk or scale down to focus on the business class market. Typically they stay away from that because they understand the benefits of the three class configuration and are comfortable playing a commodity game at the back of the airplane. When you go to a single business class configuration they get a little less comfortable."
Will BA and Virgin come in?
Whether BA or Virgin will choose a one- or two-class configuration, how many aircraft they will acquire or re-configure, and whether they follow through on their plans to launch services between the USA and continental Europe at all are questions many are eager to have answered. "Nobody knows what will happen. Nothing has been announced," says L'Avion chief executive Marc Rochet. "If they [BA and Virgin] come from day one with 10 airplanes it will be ugly [but] in my opinion it will be less than 10 airplanes. There is room in the market but there isn't room for 10 airplanes."
L'Avion is now the only all-premium carrier operating between Paris and New York, a market BA and Virgin are eyeing. The market may seem large enough to support multiple all-premium carriers but Rochet points out that, at about 300,000 premium passengers per year, it is one third the size of the London-New York market: "If there is room for three operators on New York-London, there is room for only one on New York-Paris."
L'Avion plans to add a second daily flight between Paris and New York later this year, which Rochet says should help meet its goal of achieving a 15% to 20% share of the premium market. Given the stronghold the legacy carriers currently operating in the Paris-New York market have on accounts with large French and US companies, how much market does that leave for UK carriers?
Fearing all-premium operations could cannibalise their existing business, legacy carriers until now have been shy to venture into the all-premium market. For example, American Airlines has rejected the possibility of launching an all-business operation and is instead fighting back at Eos and Maxjet by launching service from New York to Stansted in normal three-class configuration. "We certainly considered that [an all-premium operation] but we think that the traditional mixed cabin - with 30 lie-flat seats in premium - is the answer," says American executive vice-president for global sales David Cush. "A separate operation would just add too much complexity. We continue to believe that we have to offer the network advantages."
American will use a Boeing 767 with newly installed angled lie-flat business class seats on the new Stansted flights. American is also now installing new business class sleeper seats on the Boeing 777s it uses to serve Heathrow.
Delta Air Lines similarly says it has no plans to launch an all-premium operation, explaining that "a worldwide network and the frequent-flyer plan and improvements to the premium cabin will continue to attract passengers".
Silverjet's Hunt does not expect many legacy carriers to launch all-premium operations: "It's very hard for legacy carriers to get into all-business class aircraft because they are locked into these big A380s, 747s and 777s."
Legacy carriers are also well aware of the risk of failure. Italy's Eurofly tried an all-premium service from Milan to New York for eight months with a 48-seat A319LR before dropping the service and returning the aircraft early this year, citing a €9 million ($12 million) loss on the route. Gulf Air in 2003 also offered an all-premium service from Abu Dhabi to Geneva using a Royal Jet BBJ but the service was quickly suspended.
But several legacy carriers are seriously studying launching all-premium operations in addition to BA and Virgin. For example, Austrian Airlines director of business sales in Austria, Christina Debbah, reveals the carrier is looking into it: "The need for service-oriented, high-class quality products is growing especially in Eastern Europe where our strategic focus and competence lies."
Singapore Airlines senior vice-president products and services Yap Kim Wah also reveals the carrier is studying the concept, although it has no firm plans. "We're studying this from a feasibility point of view," he says.
Koncilja of Swiss does not see why legacy carriers should be afraid that new all-premium operations will adversely impact existing operations: "They are totally complementary. It hasn't affected the other operation at all. One hasn't stolen or cannibalised the other."
Thomas predicts PrivatAir will secure more airline customers, including US majors: "Everyone is in advanced study. Everyone is waiting for bold announcements from competitors. There's a lot of talking going on in the market place."
While 17 of the 20 aircraft operating in all-premium configuration are currently flying over the Atlantic, the biggest opportunities may not lie in Europe or North America.
Eos and Maxjet are both looking at Asia, as well as up to 30 new transatlantic markets. In July Maxjet applied for rights to launch a Shanghai-Seattle-Los Angeles service in 2009. Hunt says SilverJet is studying 30 potential routes, only nine of which are over the Atlantic with the balance including Africa, the Caribbean, Asia and the Middle East. Rochet says L'Avion is looking at linking Paris with Africa and the Middle East.
There is already one all-premium operator in the Middle East and one in Asia. Saudi Arabia's National Air Service launched its Al-Khayala all-business service in 2004 and today offers two daily flights from Riyadh to Jeddah and four flights per week from Riyadh to Dubai.
"I think all-premium for short- and medium-haul only works in Gulf countries," says chief commercial officer Claus Fischer, explaining that business passengers in the region appreciate the exclusivity of the service, which uses private terminals.
Al-Khayala, however, has by no means been a runaway success. Unprofitable services from Jeddah to Damman and Dubai were dropped earlier this year and while Jeddah-Riyadh is now averaging load factors of about 80% the Riyadh-Dubai service is averaging about 40%.
Fischer says there are no plans to expand the Al-Khayala service and for now wants to stick to only two aircraft and two routes. "There were some experiments in the route network that didn't work out so we went back to the basics," he says, adding that flights to Europe "were discussed but we doubt it would work. We don't have the connecting traffic Lufthansa and Swiss have."
Swiss in June began using its wet-leased BBJ to operate from Zurich to Riyadh on the one day per week the aircraft does not fly to New York. Koncilja says the new Riyadh flight, which operates alongside the normal four times weekly A330 Zurich-Riyadh service from Swiss, will operate until early September on a trial basis and if successful will be extended. He adds Swiss is also studying launching all-premium services to other Middle Eastern and Asian destinations, but is not about to commit to several additional BBJs at once.
"We're looking for more routes [but] we won't jump," says Koncilja. We will do it step by step, especially out of a market like Switzerland which is not that huge. It's not our strategy to add five or 10 BBJs."
Lufthansa has a similarly conservative strategy. Benz says the German carrier will stick to three aircraft "for the time being" but is evaluating several possible new routes to the USA from other secondary German cities such as Berlin, Hamburg and Stuttgart, and from European destinations outside Germany as well as potential Asian routes.
KLM is even more conservative. Former KLM chief executive and current SkyTeam chairman Leo van Wijk says KLM's strategy of using a PrivatAir BBJ to operate a daily flight on the Amsterdam-Houston route alongside a daily Boeing 747-400 combi frequency has worked, but there are not many potential new markets. "It's a practical solution to a single market rather than a development," says van Wijk. "The Houston market is perhaps atypical in that there is high demand for business class. So far we haven't developed any plans to expand the operation."
Thomas says its three airline customers use PrivatAir mainly "as a capacity adder" in long-haul markets they already serve with widebodies. In some cases PrivatAir has been used to test a new market. In the case of Munich-Newark the service has been so successful it is now being replaced by a widebody in normal configuration.
All Nippon Airways (ANA) is also using its new fleet of Boeing 737-700ERs in all-premium configuration to test new routes, says executive vice-president international relations Katsuhiko Kitabayashi. The Japanese carrier launched its ANA BusinessJet service in March on the Nagoya-Guangzhou route with a 737-700ER, and will use its second 737-700ER to launch Tokyo-Mumbai in September.
Read more about all-premium and how two carriers are using small business jets to feed their hubs: www.flightglobal.com/premium
To read our chief executive interviews with Greg Thomas and Marc Rochet, visit www.flightglobal.com/PrivatAir and www.flightglobal.com/L'Avion.