First class air travel has often been a playground for the rich and
famous. On a first class flight from New York to Dubai on Emirates
Airlines, wealthy passengers can sleep in private suites that feature
floor-to-ceiling sliding doors, relax in the Airbus A380's shower spa
and drink limited edition champagne while eating mounds of caviar.
If you wanted to book that roundtrip flight on Emirates at the last
minute, it could cost you over $23,000.
Flying to Mumbai from New York?
Etihad Airways offers a three-room luxury suite called The Residence,
which features a private bathroom, a private living room and a
personal butler.
Flying roundtrip on Etihad for that flight could be over $36,000.
And, for about $3,000 on an American Airlines Flagship First flight
from New York to Los Angeles, travelers have access to an exclusive
check-in area and premium wines in the flagship lounge.
While airlines make a significant amount of money packing people into
coach like cattle, premium cabins like business and first class are
still a major source of income for U.S.
carriers. The U.S.
airlines are doing quite well, frankly.
Their margins range from the mid-single digits to the mid-teens
presently. Delta has been the leader for quite some time.
So why are first class tickets so expensive?
And who is paying for them?
And with changes in technology and environmental issues at the
forefront. Will the first class airplane ticket even be around the
next 20 years?
The world's first passenger airline started service on January 1st,
1914 between St Petersburg and Tampa, Florida.
It lasted only a few months and only flew in good weather but set the
stage for the future of passenger travel.
Around that time, airplanes were flying mostly mail and passenger
service was virtually non-existent.
With big improvements in aircraft performance and aviation technology
in the 20s, 30s and 40s, passenger service took root and started to
expand. Before the 1950s,
everyone who flew flew first class because it was the same service
for everybody on the airplane.
The vast majority of people who flew were affluent, mostly male,
mostly business people who are flying for business purposes.
But, the end of World War II brought about a big change to the air
travel industry. What happens is after World War II, there are lots
and lots of surplus airplanes out there.
And there are a number of veterans in particular who wanted to
continue to fly, to make money from flying.
New carriers called non-scheduled airlines, similar to charter
flights began appearing, posing a direct threat to the existing
airlines that were heavily regulated.
Working together gave non-scheduled airlines the ability to offer
lower prices on cross-country trips, pressuring existing carriers to
drop their fees.
To attract the tourist class, the existing airlines came up with a
pricing structure of different costs for different seats.
Eventually, the airlines work with the CAB to essentially undermine
the non-sked's by creating a tiered passenger ticketing system where
you would have first class and coach, that would be closer to the
prices that were offered by the non-sked's to attract the middle
class folks.
By the end of the 50s, with improvements in technology, airplanes
moved from the piston engine to jet engines.
The bigger Boeing 707 allowed airlines to reconfigure their cabins,
giving more amenities and space to first class fliers.
In January 1970, Pan Am flew the Boeing 747 for the first time on a
flight from New York to London.
The double decker plane known as the Queen of the Skies, featured a
restaurant with luxury services for first class passengers.
The introduction of the 747 really took first class to a whole other
level, very premium service with yes, a lounge, a bartender, they
called it a piano bar, it was actually an organ but you had live
music on these flights.
And deregulation in the 1970's may have had an even bigger impact on
the airlines. In 1978, the Airline Deregulation Act removed some
government controls, giving the airlines more say over the services
they offer and the fees they could charge.
Well, business class comes about because of deregulation.
The airlines now can compete any way they want to compete.
And with the rise in the business class, airlines look to offer even
better services to attract high paying first class customers.
For example, in the mid-1990s, British Airways introduced fully
reclining seats into their first class cabins.
American carriers later followed with their version of the flat bed
seat. American Airlines generally follow the lead of others.
They will pioneer technology like they computerized reservation
systems. But in terms of service and amenities, the United States
generally follows the lead of what happens elsewhere in the world.
Then, in the 90s and 2000s, the airlines faced additional competition
for first class customers from private jet companies.
If you've got your own plane or your corporate plane, you don't have
to go through the security hassle.
The airlines and the airports then have to try and answer that with a
better experience, not only in the airport, but in the air for these
folks to keep them flying commercial rather than shifting to private.
U.S. legacy carriers, Delta Air Lines, United Airlines and American
Airlines make a lot of their money at the front of the plane,
specifically, according to analysts, selling business class and first
class tickets on long haul premium heavy flights.
In August 2019, more than 6.4
million people flew in premium seats on North American flights, about
nine percent of the total 67 million seats occupied.
But why are some premium seats so expensive?
The airlines are getting much more sophisticated and they're getting
to the point where they can charge just the amount of money it needs
to fill those seats.
That's how they make their money.
It's butts in seats.
The airlines use a strategy called airline revenue management to
maximize profitability.
Essentially prioritizing passengers based on fares.
So airline revenue management, this is how airlines make their money.
This is how they know whether to charge a business traveler a lot for
a seat for a last minute flight.
Airlines use algorithms to try to find out the most that they can get
out of passengers. Business travelers, for example, tend to book
their tickets at the last minute, giving airlines the ability to
charge more. They can make more money selling a last minute ticket to
a business person than they can for people who are booking for
leisure travel. For people who are booking for leisure travel, they
shop for those tickets.
For the business traveler, though, especially the one who is flying
at the last minute.
They don't have that luxury.
There's a seat. Here's the price.
They pay it. But even though airlines can make a hefty profit on
first class travelers.
Not everyone pays the full price.
First class has changed a lot over the years.
So airlines, including Delta, has actually said we used to give away
almost all of our first class seats, they were free upgrades to some
of their most loyal customers.
And that's been one of the big changes we've made in our marketing
strategy over the last number of years.
You know first class, we used to get first class away to just about
everybody and our loyalty arrangements but today we sell about 50
percent of first class seats.
They'll give away about 50 percent in terms of loyalty upgrades, but
about 50 percent is sold.
In 2018,
premium class travelers made up only a handful of the total number of
international origin-destination passengers at 5.2
percent, according to the International Air Transport Association.
But they accounted for a big chunk, nearly a third of airline
revenue. Industry consolidation and a strong economy in
recent years has allowed the airlines to invest in more fuel
efficient planes with better cabins focusing on those premium
classes. In 2008, Northwest Airlines merged with Delta Air Lines.
In 2010, Continental Airlines merged with United Airlines and in
2013, U.S.
Airways and American Airlines parent AMR merged.
Since the economy is pretty good, airlines are putting a lot of
resources into improving those business class cabins.
They're putting in these suites that have sliding doors, they're
improving their food and they really need to compete with the
international carriers, which have had a pretty plush product to
begin with. In addition to a few other big markets, American has its
Flagship First program for first class and business travelers from
New York to Los Angeles, that offers quick passage through security,
a first class lounge and lie flat seats.
The Delta One service is available on long haul international flights
and in select long haul domestic markets.
It offers a 180 degree flat bed seat with a full height door.
And United, offers their premium transcontinental service that has a
fully flat bed with more than six feet of sleeping space and a
fifteen inch monitor.
Those cabins are the face of the airline.
Even though most passengers can't afford them, the expensive first
class suites entice travelers to rack up loyalty points for a chance
to fly up front.
And those premium services have been good for the bottom line of U.S.
legacy carriers.
Airlines in the U.S.
at least are headed to their tenth year of profitability it's the
longest stretch that we know on record.
For its quarter ended June 2019, Delta announced operating revenue of
$12.5 billion dollars, $1 billion higher than the previous year.
According to the company, the revenue hike included a ten percent
increase in premium product ticket revenue.
And in the quarter ended September 2019, Delta had revenue from their
main cabin of $6 billion and an additional $4 billion from their
business, cabin and premium products.
American and United did not report the amount they make from their
various cabins. CNBC reached out to both airlines to request this
revenue breakdown, but they declined to share this data with us.
On a plane, every square inch is valuable real estate and first class
seats take up a lot of space.
With improvements to business class
in recent years, there's been a shift by some airlines away from
first class cabins.
Traditionally, the first class cabin has been the home of the 180
degree flat bed seat, while business class passengers had to contend
with adjustable head and foot rests.
But in January 2000, British Airways announced they would offer a
full, flat bed in business class on their London to New York route.
First class is now internationally become the sort of hybrid of first
and business class and airlines, United, Delta, American have kind of
collapsed the two.
And low cost carrier, JetBlue, is also trying to grab a slice of the
business class market.
In April 2019, JetBlue said it intends to start multiple daily
flights from New York to London, flying the long range version of the
Airbus A321, which will include its premiere service called Mint.
That's JetBlue's version of business class, except tends to be much
cheaper than the competition.
The price of business class seats has come down, and that's partly
because of airlines like JetBlue that have cheaper products out
there. And then there's business class little brother premium
economy. There's actually a new class of service, at least new to the
American carriers that's called premium economy, it's sort of like a
business class junior.
And that's for people who can't afford maybe business class and the
lie flat seat. According to Skyscanner, a premium economy ticket is
about 65 percent less than the price of a business class ticket.
Changes in technology and environmental concerns also pose a
challenge to first class travel.
Today, private jets fly faster and longer distances than ever before.
Instead of spending tens of thousands of dollars on first class
commercial tickets, companies now have the option to charter a
private jet or use fractional ownership, where several unrelated
parties share in the purchase of an airplane.
Several companies sell part ownership of private business jets,
including Netjets owned by Warren Buffett's Berkshire Hathaway.
There is that one percent, that segment of the market for whom the
private jet is just the ultimate convenience.
You can fly when you want.
It is essentially all first class service.
Changing technology could also impact the decision on whether
companies decide to purchase a pricey first class ticket in the first
place. Why fly thousands of miles to distant places when Skype, Zoom
or virtual reality will do?
And for companies trying to burnish their green credentials, flying
first class might be bad publicity and bad for business.
Airlines are deeply challenged by climate change.
They are the big emitters.
The automobile market is moving to electric cars.
There is no electric airplane out there, according to the Air
Transport Action Group.
About two percent of human induced carbon dioxide emissions worldwide
come from air travel.
And people who fly first class have a bigger carbon footprint than
the average passenger.
As much as seven times as large, according to the World Bank.
But even though airlines are decreasing the amount of space they are
allocating for first class travelers, carriers including Delta,
United and American,
for the time being, have found big profits in premium cabin services.
It's not about maximizing the amount of revenue on a plane, it's
about optimizing the plane, getting the price points right, and then
getting the seat and configurations to match what you're trying to
sell.