We can sleep easier in our beds with the advent of new business-class product offerings, writes Chris Tarry of CTAIRA.

Over the last few weeks a number of airlines (British Airways, Cathay Pacific and Singapore Airlines in particular) have either announced or unveiled new offerings for their long-haul business class cabins.

At the same time, the third-quarter results season has shown the benefits of better traffic mix, and particularly fuller business-class cabins, on yields. While strong in many markets, it appears from the latest IATA figures that the rate of growth of premium traffic has slowed in a number of these compared with the first half of 2005.

Excluding intra-European Union and domestic premium traffic from the data, the North Atlantic market alone accounts for about a quarter of all premium traffic. This grew by some 2.2% in the first six months of 2006 compared with 5.3% in the first half of 2005.

On the same basis, premium traffic between Europe and the Far East accounts for some 12% of the total, but experienced growth in excess of 10% in the first half of 2005 as well as the first half of 2006.

Premium demand on the North Atlantic appears reasonably well correlated with stock exchange indices and the level of merger and acquisition (M&A) activity. While there are signs of a slowing US economy it may be that the M&A cycle does not coincide with the economic cycle and lasts into 2008.

However, as we have seen in the past, an expectation of tougher times seems to be reflected in the corporate travel budgets that underpin premium travel. Demand to Asia is strong and in the near term is likely to continue.

The launch of BA's new bed in business class reflects the shortening of product life cycles. For BA the challenge is to recover the £100 million ($190 million) investment which, if written off over five years in a straight line, suggests a cost of £20 million a year. BA is also increasing the number of business-class beds on its Boeing 747s which, when complete, will result in an 8% increase in capacity.

This will all well and good if the market continues to expand, but it is likely that the change will fully roll out just as the market is on the way down. The flip side to the profit boost provided by strong premium traffic is that if it declines the effect also immediately flows through. The test comes if the market falls or new competitors enter the fray. How could BA maintain its volumes?

There are ways to keep up with fare cuts. However a reasonably sophisticated back of the envelope calculation suggests that if the average premium fare on BA's services to New York alone is cut by £200 ($378) each way (around 10% off the advertised fare), the annual revenue loss may be around £80 million and the profit loss some £70 million.

Another way of expressing it is to hold fares constant and reduce the passenger numbers by 10%. Unfortunately the outcome may be one where both passenger numbers and achieved fares reduce.

In Asia both SIA and Cathay have announced new offers in business class. The new bed offered by SIA will be 30in wide, cutting the number of seats across the cabin from 2+3+3 to 1+2+1. Given the need to have at least a similar number of business-class seats suggests the starting point for the number of economy seats will be lower anyway - even before the effects of increased legroom for passengers travelling in this part of the aircraft. This in part explains why SIA is seeking a 10-20% premium over existing fares when the new seats are introduced.

Although increasing premium capacity, BA has not changed its 2+4+2 layout on its 777s or the main deck of the 747.

While beds on board are now "de rigueur" they offer different comfort levels. The latest Skytrax survey ranks business-class cabins by sleep quality: BA and Virgin Atlantic are ranked at five stars along with South African Airways and Air New Zealand, with SIA's current product attracting four stars and Cathay's just three both of which are likely to change with their new products. For the record both American and United Airlines are ranked with two stars.

However, beds represent only one part of the product offer - ground and on-board service are also important even for the most hardened traveller. In this respect Asian airlines have a distinct advantage.

We are all likely to sleep better as a result of the latest product offerings but they may only serve to highlight the service gaps in other areas.

Source: Airline Business