Airline services at a premium

15 May 2014

As one regional airline launches a new class segment, the Gulf carriers are entering a premium war

On 4 May, Abu Dhabi-based Etihad Airways fired the latest salvo in the battle to attract premium air travellers in the Gulf with the roll-out of the world’s first private multi-room cabin on a commercial passenger aircraft. The same week, the chief of Qatar Airways declared the death of first-class travel, highlighting the starkly different approaches the two carriers are taking to capture a larger slice of this segment of the market.

The competition is heating up at a time when premium-class travel is enjoying a revival, growing by about 4-5 per cent a year. This follows a sharp slump in demand in the wake of the financial crisis, as travellers’ changed their spending habits.

Premium-class performance can be vitally important to an airline’s bottom line as first- and business-class cabins provide higher yields than economy seats. Globally, premium travel represented 8.9 per cent of traffic in 2013, but 27.9 per cent of revenue. But determining the optimal balance between premium and economy seating on an aircraft is one of the more difficult challenges airlines face as maintaining high passenger density throughout the plane is critical to maximising revenue.

Gulf edge

First- and business-class seating configurations are more common on routes where demand is relatively inelastic to price changes, but will vary depending on the type of aircraft being used. In the Gulf, carriers must also make allowance for the front-of-cabin prestige factor that ranks highly among their high net-worth clientele, who demand exclusivity and luxury in the air.

Gulf carriers have seen their share of global premium traffic rise from 8-9 per cent to about 11-12 per cent over the past five to six years, according to Australia-based CAPA Centre for Aviation.

One factor giving Gulf airlines an edge over the competition with regard to premium travel offerings is the young age of their fleets.

Having spent hundreds of billions of dollars on new aircraft in recent years, the carriers can introduce in-flight enhancements relatively quickly and easily by integrating it into the aircraft on order, or by modifying planes that have recently entered service.

Such is the case with Etihad Airways’ hotel-style suite in its new A380s. The 125-square-foot-cabin, known as The Residence, will boast a living room, bedroom and shower, along with a personal butler trained at the Savoy Butler Academy in London.

Research and planning for the new offering began five years ago when the airline established Etihad Design Consortium to conduct workshops in Abu Dhabi, Sydney, London and New York to identify the amenities that were most in demand by passengers.

With a price tag for a one-way ticket to New York or London costing about $20,000, the service is clearly geared to a select few customers. But the airline, which reported a 48 per cent rise in profit in 2013, is confident the new service will set Etihad apart from the rest of the industry, allowing it to “cater to the tastes of every VIP traveller”.

Service profitability

From a purely marketing perspective, the launch of the new service has been effective, as it has generated a buzz for the airline.

“The ultra-luxury offering does have the potential to generate a significant halo effect for the carrier’s branding, along with positive public relations benefits,” says Simon Elsegood, senior analyst for Middle East and Africa at CAPA. “Certainly, the non-specialist press paid attention to the… announcement, raising its profile.”

However, the suite’s high cost has left some analysts questioning whether there will be the demand to make the service profitable.

“The pricing on Etihad’s The Residence suite is obscenely high,” says Saj Ahmad, chief analyst at UK-based StrategicAero Research. “Whether they aim to discount it to make it look more attractive is one option, but then for a few thousand dollars more, you could hire your own private jet and not have to queue with 500 other passengers to get on or off an A380. There are indeed a handful of routes where Etihad will make it work, but that is going to be the exception, not the rule.”

The pricing… is obscenely high… for a few thousand dollars more, you could hire your own private jet

Saj Ahmad, StrategicAero Research

Gulf rival Qatar Airways, which has 10 A380s on order, quickly stated it had no desire to replicate Etihad’s service on its superjumbos. The carrier also said it was going one step further by eliminating first class almost entirely from its fleet, based on its view that most companies have put a ban on first-class travel in the wake of the financial crisis.

“I don’t think there will be a return to first-class travel,” Qatar Airway’s CEO Akbar al-Baker told a press conference at the Arabian Travel Market conference in Dubai in May. “The main chunk of our premium occupation is business travel… therefore we will keep only very limited first-class seats in our Airbus A380, while all the other airplanes will only have a business-class product.”

To amplify his point, Al-Baker said the airline would introduce a daily all-premium, business-class service from Doha to London beginning 15 May. The service, which will be the first of its kind in the Middle East, will be rolled out using an Airbus A319 offering 40 seats. The carrier is also working on a new berth it calls “super business class” that it will launch within two years.

The other of the Gulf’s big three carriers, Emirates, did not directly comment on Etihad’s new offering, but it has stated previously that it wants to overhaul its first-class cabins and recently indicated that it plans to offer a fully enclosed private bedroom. It already offers a shower spa for first-class passengers on its A380s.

Whether it will follow suit and offer a fully fledged suite remains to be seen. “Why would they need to copy Etihad?” says Ahmad. “If anything, Etihad’s new first class emulates the current style and privacy Emirates offers today in first class. Emirates has, and always will be, an innovator. It has even less need than Qatar Airways to follow anyone’s lead.”

It is not only the big three airlines that are reworking their premium-class offerings, low-cost carriers in the region are also launching business-class services with the aim of luring high-yield passengers.

In October, UAE-based Flydubai introduced a new business-class service that offers nearly fully reclinable seats, an in-flight entertainment system, priority check-in and fast-track immigration. The carrier currently offers a business-class service on 46 of its routes, and plans to make it available for all its destinations in the future. 

Saudi low-cost carrier Flynas has also entered the fray with the launch of business-class seats on its flights between Saudi Arabia and the UAE. The new business strategy is partly in response to the competition set to enter the Saudi aviation sector this year, as Qatar Airways and Al-Qahtani Aviation Company launch domestic carriers in the kingdom.

“Competition is inevitable wherever you go, you just have to be better than your competitor in some way or other,” says Raja Azmi, CEO of Flynas. 

Low-cost carriers

One factor that makes premium traffic viable for regional low-cost carriers is that they provide flights to many destinations that are not offered by their full-service peers. Their passenger load factors also are typically lower than their counterparts in Europe, North America, or even Asia-Pacific, so it makes sense for them to sacrifice some seating capacity for a product that offers higher yields, Elsegood says.

They are unlikely to lose traffic if they convert three or four rows of economy-class seats into two or three rows of business-class seats, as was the case with Flydubai, which has only lost about 15 seats on its 737s by switching 27 economy seats into 12 business-class seats. 

One of the few local airlines that has signalled no intention of offering a premium service is Sharjah-based Air Arabia, the largest low-cost carrier in the region.

Given that it currently enjoys very high load factors, the carrier appears content with its all-economy layout and has announced no plans to hybridise its offering.

“I believe the carrier sees the region as over-served for premium seats and is more interested in maintaining its niche as a low-cost operator,” says Elsegood. But with Air Arabia one of the few hold-outs in the region, the battle for premium-class passengers in the Gulf can only be expected to heat up over the next few years. 

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