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Steep Business Class Discounts' Long Term Effects  
User currently offlineOP3000 From United States of America, joined Jun 2009, 1761 posts, RR: 2
Posted (4 years 11 months 1 week 1 day 4 hours ago) and read 4714 times:

The recent trend towards unheard of price reductions, upgrade availability and specials for Business Class seats has eroded airline profits this year, as outlined by this Bloomberg article.

The lingering question is whether the industry has gone too far in diluting the perceived value of business class for too long a time frame (assuming the specials will continue until the end of 2009). If so damage to the pricing power of business class fares could be permanent. Opinions, perspectives?

http://www.bloomberg.com/apps/news?pid=20601093&sid=aLAjvuo_7p1c

"BA Chief Executive Officer Willie Walsh told shareholders last month that business travel may never fully recover from the global economic slump, threatening the airline’s “long-term viability” unless at least 4,000 jobs are cut. It may also rip out some of the luxury seats it installed only three years ago in a 100 million-pound revamp.

While cheap upgrades, heavy discounting and no-frills business seats may help airlines fill the front of their planes, carriers face a delicate balancing act in order to avoid permanently damaging demand for premium tickets.

Swiss Air’s Donzel said upgrade offers can’t be run for too long before ordinary corporate travelers switch from business bookings to economy tickets with cheaper upgrades.

For those passengers who do find their way to the front of the plane, the distinction between a carrier’s premium seats and those back in coach class is becoming less obvious. British Airways has reduced the variety of newspapers and alcoholic drinks on some European business flights and cut after-dinner chocolates, while Air France has saved 36,000 metric tons of fuel annually through weight reductions that include lighter glassware in its premium cabins."

[Edited 2009-08-24 22:02:37]

23 replies: All unread, jump to last
 
User currently offlineFlighty From United States of America, joined Apr 2007, 8403 posts, RR: 2
Reply 1, posted (4 years 11 months 1 week 1 day 4 hours ago) and read 4680 times:



Quoting OP3000 (Thread starter):
The recent trend towards unheard of price reductions, upgrade availability and specials for Business Class seats has eroded airline profits this year,

That's ridiculous. Profits were eroded by poor business travel demand. They were not eroded by the decision to cut business class seat prices. Essentially, prices are an outcome of a complex competition arrangement. Over or under-capacity creates the prices.

If so many business class seats are needed in the future, the corporations will gladly pay good money for them at that time! Until then, airlines can wait, or sell their planes, or do whatever they feel like doing.


User currently offlineStitch From United States of America, joined Jul 2005, 30572 posts, RR: 84
Reply 2, posted (4 years 11 months 1 week 1 day 4 hours ago) and read 4672 times:
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Well Economy is also seeing services cut, so...  Wink

Airlines are reducing fares to fill the cabin because they have so many seats, the long term effects will likely be a reconfiguration of the premium cabins to reduce the number of seats to better match the demand for what "full fare" passengers exist.


User currently offlineIkramerica From United States of America, joined May 2005, 21474 posts, RR: 60
Reply 3, posted (4 years 11 months 1 week 1 day 4 hours ago) and read 4650 times:



Quoting Stitch (Reply 2):
Airlines are reducing fares to fill the cabin because they have so many seats, the long term effects will likely be a reconfiguration of the premium cabins to reduce the number of seats to better match the demand for what "full fare" passengers exist.

An expansion of Y+ on carriers that have Y+.

All business class used to be was a seat with more pitch (40"), some better food, and at worst one seat from the aisle.

It morphed into something superior to what F was on most carriers. But that can't be justified for most businesses.

As I've said many times, you can't magically grow J class demand on routes. Whether you try to by increasing the size of the cabin on your planes, or increase the size of your planes (A380), either way, you are going to end up flying a lot of empty or discounted J seats around. Or, ultimately, you'll put the J cabin back at the size of the long term demand, and then have extra Y seats to fill at low RASM.



Of all the things to worry about... the Wookie has no pants.
User currently offlineKhobar From United States of America, joined Mar 2006, 2379 posts, RR: 4
Reply 4, posted (4 years 11 months 1 week 19 hours ago) and read 4402 times:



Quoting Stitch (Reply 2):
to better match the demand for what "full fare" passengers exist.



Quoting Ikramerica (Reply 3):
As I've said many times, you can't magically grow J class demand on routes. Whether you try to by increasing the size of the cabin on your planes, or increase the size of your planes (A380), either way, you are going to end up flying a lot of empty or discounted J seats around. Or, ultimately, you'll put the J cabin back at the size of the long term demand, and then have extra Y seats to fill at low RASM.

The key, I believe, is to spur demand on the lower end, but NOT by reducing prices because, as we've seen, this doesn't work. Of course keep practice of having a few seats available at incredible low prices, but stop relying on that one tactic as the only tactic.

Just like any other industry/business, the airlines need to convince people to part with their money, and to do this they need to offer a product that people are willing to pay for. A lot of people pointed to American's "More Room" campaign but fail to also point out that bad service countered any hope of success. American thought all they had to do was add more room, but it just doesn't work that way - it needs to be a complete package to work.


User currently offlineStitch From United States of America, joined Jul 2005, 30572 posts, RR: 84
Reply 5, posted (4 years 11 months 1 week 19 hours ago) and read 4376 times:
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Quoting Khobar (Reply 4):
A lot of people pointed to American's "More Room" campaign but fail to also point out that bad service countered any hope of success. American thought all they had to do was add more room, but it just doesn't work that way - it needs to be a complete package to work.

And yet UA is seeing pretty decent revenue from up-selling passengers to Economy Plus, even though it only offers 4" more pitch. Now I've never flown AA, so perhaps UA's onboard experience is noticeably superior, but one would think that would drive people to UA for their normal Economy travel.

I think AA's problem is people generally won't pay extra for something that they can get for free. Even UA sees this, since on heavy-traffic routes many deliberately choose not to pre-choose a seat as once Economy fills, UA will park them in Economy Plus for no charge at check-in.


User currently offlineCuriousflyer From United States of America, joined Oct 2006, 680 posts, RR: 0
Reply 6, posted (4 years 11 months 1 week 19 hours ago) and read 4365 times:

There needs to be a better offer than economy for leisure travellers who can afford to pay a premium. But not many leisure travellers will burn $4,000 for J when Y is $500. With $3,500, you can spend a week in a five star hotel and go to the best restaurants. Airlines need to have a sensible offer at a sensible price. The mentality "I squeeze the market, limit available seats and make you pay insane fares when I can" alienates customers. I'll go for the airline that treats Me consistently well when I find one.

User currently offlineMogandoCI From , joined Dec 1969, posts, RR:
Reply 7, posted (4 years 11 months 1 week 19 hours ago) and read 4339 times:

The high J-fares from the past few years were artificially inflated due to a combination of booming economy plus carriers out-doing each other with the latest and greatest angled-flat then flat-bed then 30-inch wide seats.

The price differential between Y and J is too great. A lot of people are willing to pay more for more reasonable comfort on 9+ hour journeys, but they're not willing to shell out 8x the price.

That's the vacuum that Y+ was supposed to fill - the right product with the wrong pricing. Qantas' new Y+ on their A380 with 42-inch legroom is definitely the right step. JAL's lounge access is a nice addition but not a necessity.

Here's the problem - too few airlines embraced Y+ and went straight to converting half the floor space on the plane to J. The lack of a Y+ safety net (or in BA's case, sufficient Y+ capacity) is a main reason for their downfall, and they have no one to blame but themselves.

I'm probably willing to pay 2x discounted-Y fare for Qantas' Y+, and up to 3x for the Prem+ (BizSeat) in OpenSkies. The rest are ripoffs.


User currently offlineOrdflier From United States of America, joined Jan 2005, 174 posts, RR: 0
Reply 8, posted (4 years 11 months 1 week 17 hours ago) and read 4221 times:

More and more UA's revamp of their premium cabins and the subsequent reduction of Premium seats is looking like a smarter decision. While other carriers put in more seats (at a huge cost) UA improved their product and increased the number of Economy seats (and Y+) seats.

Sounds like they were timing the market well...



ORDflier
User currently offlineMptpa From United States of America, joined Feb 2006, 545 posts, RR: 0
Reply 9, posted (4 years 11 months 1 week 17 hours ago) and read 4172 times:

It is a classic problem of once you CUT the price, it is hard to raise it later. What the best method is to enhance value to gain acceptance of the current price, reduce capacity, create 'new' fare class which is an upgrade from the Y to J without touching the J fare. This can enable them to get back to J by simply removing the intermediate fare class. Current market is determining whether they can fill J cabin or not. As seen, a lot of the markets just cannot bare the current pricing levels thus not support the supply. But, cutting C class supply and increasing Y class supply is not quite going to cut it as there is not enough or sufficient demand to fill it at the current price point. So they need to bring the price down to support the increased supply (classic S/D equilibrium).

I am not sure how the carriers with big ambitions who have A380 are fairing in terms of yield and seat filling, but as we already there are enough metal being sent into early retirement or desert storage.

Hopefully, we will recover as the economy pulls through the red territory, which as we have seen from the past will happen. The question is when, and if the carriers can sustain till that point of emergence. If they do not have the cash cushion to survive this downturn, they will fold, which will help with the supply side to bring some sort of price relief. One positive thing is that the oil is not at $150 as it was. That would have been double trouble. Again, that is being determined by the demand side as well (lower number of flights) and the fact OPEC is not willing to cut supply side drastically. All in all, it is a delicate balance where global trade and economy is performing a greatly choreographed ballet!!


User currently offlineKhobar From United States of America, joined Mar 2006, 2379 posts, RR: 4
Reply 10, posted (4 years 11 months 1 week 17 hours ago) and read 4135 times:



Quoting Stitch (Reply 5):
And yet UA is seeing pretty decent revenue from up-selling passengers to Economy Plus, even though it only offers 4" more pitch. Now I've never flown AA, so perhaps UA's onboard experience is noticeably superior, but one would think that would drive people to UA for their normal Economy travel.

Yet United is in deep doodoo, and if not for other factors would have posted another loss. They question is simple. Is United's idea of "Plus" attracting new business, or are they attracting more revenue from existing business? The fact that United is not running away with the market tells the answer. (that United reduced seat pitch in Y class might be a factor).


User currently offlineFlighty From United States of America, joined Apr 2007, 8403 posts, RR: 2
Reply 11, posted (4 years 11 months 1 week 16 hours ago) and read 4107 times:



Quoting Khobar (Reply 10):
Is United's idea of "Plus" attracting new business, or are they attracting more revenue from existing business?

It is not repelling new business. And it is attracting some revenue at the airport from existing passengers. So, it is doing some business greater than zero.

Quoting Mptpa (Reply 9):
It is a classic problem of once you CUT the price, it is hard to raise it later.

That is what Bloomberg said, but I don't think there is any basis to say that. Pricing is something they are doing for the moment. They can change it tomorrow. When yields are too low, the problem is generally overcapacity, not marketing voodoo IMO. I do not believe the corporate travel directors will revolt when J class returns to its true price. They have no choice. Many companies will never send an employee overseas in Y.


User currently offlineTharanga From United States of America, joined Apr 2009, 1861 posts, RR: 1
Reply 12, posted (4 years 11 months 1 week 16 hours ago) and read 4102 times:



Quoting Flighty (Reply 1):
Essentially, prices are an outcome of a complex competition arrangement. Over or under-capacity creates the prices.

Markets aren't nearly that simple. There's a lot of psychology that goes into the shape of the demand curve. If people become convinced that a product isn't worth $x anymore, then the demand curve shifts. It's plausible that this mentality outlasts the recession - that people will be less willing to spend on certain things, even after the economy picks up again.


User currently offlineFlighty From United States of America, joined Apr 2007, 8403 posts, RR: 2
Reply 13, posted (4 years 11 months 1 week 16 hours ago) and read 4088 times:



Quoting Tharanga (Reply 12):
It's plausible that this mentality outlasts the recession - that people will be less willing to spend on certain things, even after the economy picks up again.

Sure -- but let's not blame a particular sales promotion for that global reality. The headline could read, "global psychology affects business class pricing for years to come," and that's something worth talking about. But, businesses never were ecstatic to pay $8000. For the moment, it remains a requirement of doing global business. It won't be going out of style.


User currently offlineTharanga From United States of America, joined Apr 2009, 1861 posts, RR: 1
Reply 14, posted (4 years 11 months 1 week 16 hours ago) and read 4038 times:



Quoting Flighty (Reply 13):
Sure -- but let's not blame a particular sales promotion for that global reality. The headline could read, "global psychology affects business class pricing for years to come," and that's something worth talking about. But, businesses never were ecstatic to pay $8000. For the moment, it remains a requirement of doing global business. It won't be going out of style.

Let's put it this way: the global recession is causing the immediate drop in profits, but to some extent the change in demand may be sticky. Deep discounting can contribute.

Deep discounting has been seen to have similar effect in the automobile market, I believe. If you cut prices often enough, people will come to think of that as the normal value of your product, and you have trouble raising the prices back up again.


User currently offlineIkramerica From United States of America, joined May 2005, 21474 posts, RR: 60
Reply 15, posted (4 years 11 months 1 week 15 hours ago) and read 3977 times:



Quoting Khobar (Reply 4):
A lot of people pointed to American's "More Room" campaign but fail to also point out that bad service countered any hope of success.

That's so true. At the same time AA was adding more room in Y, they were just falling apart in terms of customer service. I stopped flying them because their service was so poor, especially on the ground in DFW during WX delays, even though as a tall person, I could have used the extra couple of inches in Y. At that time, I switched over to CO for the customer service and just worked like mad to get the exit row, and was successful over 90% of the time.



Of all the things to worry about... the Wookie has no pants.
User currently offlineStitch From United States of America, joined Jul 2005, 30572 posts, RR: 84
Reply 16, posted (4 years 11 months 1 week 15 hours ago) and read 3957 times:
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Quoting Khobar (Reply 10):
Yet United is in deep doodoo, and if not for other factors would have posted another loss. They question is simple. Is United's idea of "Plus" attracting new business, or are they attracting more revenue from existing business?

It's probably doing the latter, but that is something AA's MRTC could not do since whatever price you paid, you benefitted from the extra legroom. With UA, you always needed to pay more, be it because you flew on a Y fare (though I believe that no longer gets you in), you were a UA Mileage Plan elite (so you flew 25,000+ miles on UA a year) or you paid the upgrade fee.

Quote:
That United reduced seat pitch in Y class might be a factor).

To my knowledge UA has not adjusted the pitch of the Economy cabin.


User currently offlineBP1 From United States of America, joined Aug 2007, 593 posts, RR: 1
Reply 17, posted (4 years 11 months 1 week 14 hours ago) and read 3929 times:

Also, some airlines, like Cathay Pacific are paying corporate travel agencies as much as 40-45% commission on J class tickets from the USA to Asia.

Cheers,
BP1



"First To Fly The A-380" / 26 October 2007 SYD-SIN Inaugural
User currently offlineKhobar From United States of America, joined Mar 2006, 2379 posts, RR: 4
Reply 18, posted (4 years 11 months 1 week 14 hours ago) and read 3915 times:



Quoting Stitch (Reply 16):
It's probably doing the latter, but that is something AA's MRTC could not do since whatever price you paid, you benefitted from the extra legroom.

I flew four times with AA when they had the MRTC. The extra room was nice, but the service was stunningly bad. Thus I have not flown AA since.

Quoting Stitch (Reply 16):
To my knowledge UA has not adjusted the pitch of the Economy cabin.

They reduced from 32" to 31" from what I've read.

But here's what's interesting - United is able to sell those so-called premium seats for substantial money. The big question the airlines, including United, need to be asking is WHY??? The answer seems obvious - because people are willing to pay for it.


User currently offlineStitch From United States of America, joined Jul 2005, 30572 posts, RR: 84
Reply 19, posted (4 years 11 months 1 week 14 hours ago) and read 3879 times:
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Quoting Khobar (Reply 18):
But here's what's interesting - United is able to sell those so-called premium seats for substantial money. The big question the airlines, including United, need to be asking is WHY??? The answer seems obvious - because people are willing to pay for it.

But only if they have no other choice, which wasn't the case with AA's MRTC and isn't the case with B6's post-wing seating (which has more pitch then seats forward of the wing).


User currently offlineKhobar From United States of America, joined Mar 2006, 2379 posts, RR: 4
Reply 20, posted (4 years 11 months 1 week 12 hours ago) and read 3779 times:



Quoting Stitch (Reply 19):
But only if they have no other choice, which wasn't the case with AA's MRTC and isn't the case with B6's post-wing seating (which has more pitch then seats forward of the wing).

United's Premium Y is fully a choice, and people are making the choice to spend more money for just the room (which indicates that United's service must still be at least okay). My flights on United have been pretty good - I haven't had a bad experience yet.

American failed not because they didn't give people the choice but because they relied on the MRTC program ALONE - they thought they didn't need anything else, like friendly service or organization. I haven't flown them in years because of the bad impression I got with them.

Same for US.


User currently offlineJbernie From Australia, joined Jan 2007, 880 posts, RR: 0
Reply 21, posted (4 years 11 months 1 week 10 hours ago) and read 3719 times:

It isn't a matter of IF the demand will be there it is just a matter of WHEN. Right now we are all struggling to see improvement in so many economies, see a few quarters of modest growth and people will be more relaxed with their wallets. Give them a few more years and they will be back to excess. When times are great not many people want to play ultra conservative.

This isn't to say that some airlines wont trim the number of seats they have in their premium cabins so that their supply meets or is exceeded by demand to help keep prices up. Certainly those airlines that have a proper Y+ cabin will benefit as the step up from Y is easier to justify than going from Y to Business.


User currently offlineOlympic472 From United States of America, joined Jun 2008, 456 posts, RR: 0
Reply 22, posted (4 years 11 months 1 week 5 hours ago) and read 2991 times:

We know that Business class cabin are always overpriced with the revenue used to subsidize the back of the plane. Reducing Business fares may bring them in-line with their "actual" costs, but unless airlines fill the plane this move will still hurt them.

From my personal experience on UA they are managing their inventory quite well. Even though they may be upgrading passengers, they have not significantly discounted their Business fares. On all my trips this year (domestic and international) UA was 95% to 100% full in all cabins.

So there are other ways to fill the Business cabin besides discounting.



Civil Aviation has a "Need for Speed"!
User currently offlineKhobar From United States of America, joined Mar 2006, 2379 posts, RR: 4
Reply 23, posted (4 years 11 months 6 days 16 hours ago) and read 2759 times:



Quoting Jbernie (Reply 21):
It isn't a matter of IF the demand will be there it is just a matter of WHEN. Right now we are all struggling to see improvement in so many economies, see a few quarters of modest growth and people will be more relaxed with their wallets. Give them a few more years and they will be back to excess. When times are great not many people want to play ultra conservative.

But times have been good in the past and that has done NOTHING to stop the downward spiral - at least in the US. In some other parts of the world it's different, with service being high on the list for many airlines.

And you are correct - when times are good not many people want to play ultraconservative. So we get what we got with loads of people overextending themselves and being provided even bigger shovels with which to dig. Why? In most cases they were enticed. No one wakes up and decides to go get a big screen television. They first have to have a seed of "wow, that's the thing to have", and that is one big ingredient the airlines are missing.

Imagine buying a television that had no tuner at all. It has only an RF input. You want sound? Pay extra. You want channels? Pay extra. You want multiple channels? Pay even more extra. Color? Extra. Etc. etc. etc. No one sells televisions that way, for good reason, and every manufacturer has their pitch to try to get you to buy theirs.

Even our electricity "company" advertises, and they have a monopoly here (we have two companies, but we cannot really choose which one we want, so they do not compete).

Like any other business, airlines must EARN their customers. Stop going after those who have to fly (an ever shrinking pool) and start going after those who want to fly. The business of racing to the bottom of the barrel has got to stop.


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