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The Economics Behind Premium Cabin Classes

An Apartment in the Skies!

We’ve come across numerous advertisements featuring luxurious three-bedroom apartments with state-of-the-art amenities such as private swimming pools, sophisticated spas, deluxe salons and the like. A lot of these advertisements also highlight how they adorn the city skylines and offer some of the most breathtaking views that one could ever ask for. Leading construction firms are in fierce competition to build the world’s tallest structures with the highest number of floors, and break world records in the process.

Talking about the world’s tallest buildings, Dubai’s crown jewel, the Burj Khalifa springs to mind almost instantly. At over 2700 feet and more than 160 stories, the Burj Khalifa holds multiple records: it is the tallest building in the world, it has the highest number of stories, and the list goes on.

Fig. The Burj Khalifa

What if we told you that the world’s highest apartment sits at over 30,000 feet up in the air? Hard to believe, isn’t it? Interestingly, this unique distinction is also held by a UAE based firm. Enter Abu Dhabi based UAE flag carrier Etihad Airways. Etihad’s Airbus A380s feature three-bedroom luxury apartments 40,000 feet up in the skies! Going by the name ‘The Residence’, it is the epitome of opulence and extravagance, with a living room, double bed as well as a private shower! The luxury isn’t just limited to the experience onboard – it starts right from your home, with a private chauffeured limousine to drop you at the airport, as well as access to a ‘secret’ private lounge, complete with a spa and an a-la-carte restaurant at Abu Dhabi airport before boarding!

Fig. The Residence

The Economics Involved

Now let’s come to the big bucks. What is the typical cost of a ticket on this flying apartment? A round-trip ticket from New York to Abu Dhabi costs $31,000 for one, and $41,000 for two. Yes, you heard it right. $30,000 for a flight ticket! To put things into perspective, let’s do some quick conversions: $30,000 is equivalent to around ₹25 lakhs in Indian Rupees. With this money, you could easily buy a fancy car, or start your own business, or even buy property!

When it comes to premium cabin classes, Etihad is not alone – several other airlines have their own unique interpretations of luxury in the air. Emirates’ first-class ticket comes with a slew of luxuries, including travel to and from the aircraft in a Mercedes Benz S-Class sedan, a 32-inch personal entertainment system, virtual windows for passengers in the middle of the aircraft and the like. Lufthansa, Singapore Airlines and Qatar Airways are few other airlines that are well known for their over-the-top opulent first-class cabins.

Fig. First class cabin on Emirates (Src: Business Insider)

The million-dollar question is thus, are there people willing to shell out a fortune for a first-class ticket? That people would splurge thousands of dollars on a first-class ticket seems counterintuitive on the face of it, but the reality suggests otherwise. According to the results of a study conducted in August 2019 by travel analytics company Cirium, more than 6.4 million people flew in premium seats on North American flights, which is almost 10% of the total 67 million seats occupied. According to a 2018 study by the International Air Transport Association (IATA), premium class passengers accounted for a modest 5.2% of international passengers but a much more significant 30% of total airline revenues.

Fare Dynamics and Passenger Segmentation

The next obvious question that springs to mind is, how do airlines make profits out of first class? How do they decide on how much to sell these tickets for? The answers to these questions lie in a concept known as airline revenue management. Airlines have developed sophisticated systems for forecasting demand, managing inventory and pricing tickets just right, such that they are competitive and profitable. Airlines also use dynamic ticket pricing, where the ticket prices keep fluctuating depending on a number of factors, such as demand, available capacity and so on. Advanced technologies such as artificial intelligence and machine learning are employed by airlines to arrive at the ‘sweet spot’.

To understand more about the fare dynamics that are at play, we’ll have to analyse the different segments of passengers. Obviously, this discussion omits low cost carriers as they don’t offer premium class tickets – we’ll be limiting the discussion to full-service carriers. Broadly, there are two segments of passengers flying on full-service airlines: business travellers and leisure passengers.

Fig. Leisure passengers

On the other hand, business travellers paint quite a contrasting picture: they don’t have the luxury of time. They tend to book tickets at the very last minute, giving airlines the ability to charge more. This is how airlines get away with charging thousands of dollars on a flight ticket. Business travellers can afford to pay a fortune for last minute tickets, and airlines take advantage of this fact.

Fig. A business traveller

However, not all first-class tickets are sold for money: some airlines give free first-class upgradations to their most loyal customers. Thus, even though most passengers might not be able to afford such expensive tickets, such schemes entice passengers to rack up loyalty points for a chance to fly in style.

What Lies Ahead

In recent times, the dividing line between first and business class is blurring. Lie-flat beds are now a common feature found on business class seats of most airlines, and most luxuries that were earlier restricted to first class are now available to business class passengers as well. Then, there’s also premium economy, which is a cheaper and more affordable version of business class. Thus, airlines are migrating from first class to a combination of business and premium economy classes to give passengers more choices.

Another point of concern regarding first class is its massive carbon footprint. At a time when the entire world is fighting global warming and climate change, flying first class seems quite irresponsible. First-class air passengers have a carbon footprint as much as seven times larger than the average passenger's, according to a new study from the World Bank. First class also faces tremendous competition from private jets, which offer much more flexibility.

Another contributing factor to the downfall of first class is the emergence of video-conferencing capabilities such as Zoom and Skype that completely eliminates the need for flying thousands of miles to different places. This has become especially true at a time when the coronavirus pandemic has accelerated the move to digital. For the time being, however, airlines still continue to make huge profits out of premium cabin classes, and will likely continue to do so in the days to come.

Fig. A snapshot of the G7 summit that was held virtually due to the coronavirus crisis

Are you interested to know more about the complex and challenging art of airline revenue management? Udaan Aviation Academy is conducting a three-day online workshop on Airline Revenue Management! You can gain some interesting insights into how airlines price tickets, how the COVID- 19 crisis has changed the pricing game and a lot more. So go ahead and register yourself for the course!

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