Can airlines beat this Battle of the Bulge? The Move from Democratisation to Premiumisation

There’s a million road warriors whose lives have been made easier since premium economy was introduced. Once company travel policies had bumped them from Business Class, life became, well, a lot less comfortable.

For airlines too, PE is becoming the holy grail. Together with business class itself, there’s a “premiumisation” occurring. Essentially, as fuel costs rise and aircraft delivery delays lengthen, it looks as if the full service industry is beginning to turn its back on democratisation.

This concerted focus on the bulge in the centre of the aeroplane brings with it vague aromas of a familiar behaviour – herd-like chasing the same market with overkill, as more and more airlines reconfigure to focus on the premium flyer.

Then again maybe it will be different this time. Advanced distribution strategies, greater magnetism of loyalty programmes, all salted with a pinch of AI, might just herald a new, more profitable outcome. Is that the refrain of the addicted gambler, or a rational response to a tectonic shift in corporate and consumer preferences?

Aside from wrestling alligators for cash, the airline business is the highest risk-lowest reward enterprise known to mankind.

The industry has a near-perfect ability to copy anything that appears to work. Throughout its history It has struggled to avoid commoditisation, where price is king and profits are paupers.

As for the commoditisation of premium economy, the warning lights are already flashing.

One airline introduces a successful product, attracts a yield premium and enjoys a few years in the sun. Then everybody else piles in. Seat manufacturers produce an off-the-shelf version, aircraft configurations begin to converge, comparison websites add another filter and, before long, yesterday’s innovation has become today’s minimum standard.

After a while the exceptional becomes the expected.

That is how commoditisation works. It doesn’t have to mean that every product is identical. It’s enough that passengers increasingly see the products as interchangeable - and, once they do, price regains the throne.

That’s why it’s going to be interesting to see who wins the coming Battle of the Bulge - that is the rush towards the centre of the aircraft: premium economy and business class, sandwiched between a shrinking first cabin and increasingly unprofitable economy class.

Premium economy is particularly vulnerable because, even though it’s the most valuable real estate for now, it occupies an awkward patch of territory. It does not possess the rarity or theatre of first class. It lacks the beds, lounges and corporate travel status of business class.

But nor does it enjoy the enormous volume base of economy, as cattle class becomes more uncomfortable. It is essentially selling a new degree of discomfort for long haul flying: more legroom, more recline, better food, perhaps a wider seat and fewer elbows in the ribs.

That can be a very attractive proposition when only a handful of airlines offer it. It becomes more difficult when nearly every long-haul carrier is offering something that looks broadly similar.

After all, how many different ways are there to describe a slightly wider seat? The marketers are having a field day: “More personal space”, “An elevated dining experience”, “Priority treatment throughout your journey”, “A refined cabin between business and economy.”

There will be oceans of rich content, but much of it will be saying much the same thing.

And so begins another rush to the same model. Or has the industry’s distribution competence evolved enough to avoid further destruction of the English language? What could be worse than premiumisation?

Airlines install more premium economy seats because the current revenue numbers look good. Then supply catches demand.

Competitors follow because they cannot afford to appear inferior. Aircraft manufacturers and lessors begin to anticipate the trend. The middle of the aircraft bulges further. Business class becomes 1-2-1, instead of 2-3-2, and PE sheds seats to offer more space and comfort.

But there’s no doubt it’s a winning combo at the moment. The reorganisation certainly seems to make sense; a couple of years ago, an IATA analysis found the 3% of PE travellers contributed up to 15% of passenger revenue.

Emirates’ Sir Tim Clark knows a bit about the airline industry and today regrets the airline’s reticence to jump on the PE bandwagon earlier. He recently said “We’ve been absolutely shocked at the level of demand...People have been clamouring to get into them, and paying whatever we’ve asked.”

The long haul Australia market offers a good example of Emirates’ newfound strategy, with over 5,000 weekly premium economy seats on its flights to Dubai. You don’t have to fly for 15 hours in a full economy cabin to get tired at the thought; premium economy offers at least some relief.

But as every airline joins the rush, the yield-management machines will do what yield-management machines do: start discounting to fill the seats. Upgrade offers become more generous. Loyalty redemptions open up. Corporate deals begin to include premium economy. Online travel agents line competing products up beside each other. Buyers ask why they should pay $400 more for one airline’s extra seven centimetres of legroom than another’s.

Suddenly the industry has created a new commodity.

It has been here before. Business class once became sufficiently rare and different to allow it to command extraordinary premiums. Then more airlines installed increasingly similar flat beds, so the differences narrowed. The seat remained expensive, but the product became easier to compare. The argument shifted from whether an airline offered a bed to the width of the bed, the position of the door and whether the passenger had to step over somebody else’s feet at three in the morning.

Premium economy could follow the same path - only faster.

The danger is amplified because any decision to reconfigure isn’t easily reversed. An airline can change a fare tomorrow. It can’t easily remove 30 premium economy seats and reinstall 50 or 60 economy seats because demand softens. Cabin retrofits chew up capital, remove aircraft from service and involve recertification, supply chains and engineering schedules.

Once the Bulge is built into the aircraft, it’s hard to squeeze it back to its former shape.

That makes this a classic airline bet: today’s strong yields are being converted into tomorrow’s fixed capacity.

And there are no guarantees that the passengers who have moved north will remain there. Some are corporate travellers whose employers have relaxed travel policies. Some are leisure passengers spending accumulated savings.

Some are older travellers who will pay to avoid 14 hours in cattle class and have better access to a toilet. Others are passengers trading down from business rather than trading up from economy, although for now at least, not many of them are.

Those passengers aren’t all the same; and they’ll respond differently when economies slow, household budgets tighten or corporate travel policies change.

That’s where, like the cavalry rushing over the hill, new technology is supposed to change the game.

Airlines now have tools their predecessors could only dream of: rich content, NDC, direct selling, continuous pricing, dynamic bundles, sophisticated loyalty programmes, customer profiles and increasingly powerful offer-and-order systems.

In theory, these tools allow an airline to stop selling a generic seat at a published price and start selling a tailored proposition to an identifiable customer.

Aside from price, there are lots of options.

A road warrior might be offered flexibility, lounge access and priority recovery during disruption. A leisure passenger might receive a premium economy seat bundled with baggage and a hotel. A high value frequent flyer might be shown an upgrade at precisely the point where the airline believes temptation will outweigh thrift. A small business traveller might receive a package that recognises both price sensitivity and the value of arriving in reasonable working order.

This is the great promise of modern airline retailing: the product does not have to be identical simply because the seat is.

The seat becomes just the platform. The offer becomes the differentiator. Add to that the power of points (and of course status and all that goes with it), and obviously things ain’t what they used to be.

NDC and direct selling can allow airlines to present the attributes that melted away inside old conventional fare displays. Loyalty delivers them identity and behavioural history. Continuous pricing creates more room between rigid fare buckets. Dynamic bundling allows them to assemble different combinations of flexibility, baggage, seating, lounge access, connectivity and service.

In other words, airlines may finally possess the tools to build a wall against commoditisation.

I really should end here, with that hopeful note. But then I’ve been watching the industry for a long time. Old habits die hard.

Having bricks isn’t the same as building a wall.

Every major airline is acquiring broadly the same tools. Most are dealing with the same technology providers, seat manufacturers, and aircraft types. They attend the same conferences, study the same case studies, use the same consultants, and use much the same language about personalisation and customer centricity.

There is therefore a delicious irony here: the tools designed to prevent commoditisation may themselves become commodities. Enter AI.

If every airline uses artificial intelligence to make the same prediction, offers the same bundle and prices within the same narrow range, the result is not differentiation. It is automated sameness.

Rich content can help explain a difference, but it can’t invent one. NDC can distribute a distinctive offer, but it can’t convert an ordinary offer into something distinctive. A loyalty programme can deepen a relationship, but only if the passenger values the currency, network and recognition being offered.

And none of these technologies are going to rescue a passenger whose flight has been cancelled and whose airline has stopped answering the telephone. Not yet, anyway.

The crunch is that the real barriers to commoditisation remain stubbornly operational: network, schedule, reliability, consistency, recovery, service and trust.

An airline that genuinely recognises a valuable customer during disruption has differentiated itself.

An airline that delivers the same premium economy product across its fleet has differentiated itself. An airline that provides a seamless ground experience, useful loyalty benefits and sensible flexibility has something competitors cannot instantly copy merely by ordering the same seat.

The key: Don’t confuse adding more premium seats with having a premium strategy

The winners in this Battle therefore won’t necessarily be the airlines with the largest premium cabins. They will be the airlines that resist the urge to confuse adding more premium seats with a premium strategy.

They will manage supply carefully rather than chasing the latest configuration fashion. They will protect the boundaries between economy, premium economy and business class without turning them into concrete walls. They will know when to encourage passengers to move upwards - and when a discounted premium seat simply cannibalises a more valuable customer.

Most importantly, they will use their new retailing machinery to maintain the value of the product rather than merely to fill it.

That’s the real Battle of this Bulge.

The industry is attempting to migrate from democratisation - putting more people into the air at ever-lower prices - to premiumisation: extracting more value from passengers who will pay for comfort, recognition and reduced friction.

This will appeal to destinations that want higher value tourism; although airports won’t be impressed at lower seat density; and nor will it help the industry move towards net zero.

But it’s an understandable response. The economy lemon has been squeezed almost to the last pip, while first class has retreated into a tiny halo cabin for royalty, oligarchs whose own jets are in maintenance, politicians and the wonderfully unprice-sensitive rich. The bulge in the middle appears to offer salvation.

But if every airline rushes towards precisely the same middle, it will cease to be the middle. It will simply become the new mass market - complete with too much capacity, falling yields and another round of wrestling alligators for cash.

Airlines now have better tools to avoid that outcome than at any time in their history.

Whether they have the discipline to use them differently is another matter.

(This is an excerpt from a larger study prepared for FACTS in Sydney, November 25/26)