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Airlines are doubling down on high-margin premium cabins and even expanding them on new planes.
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They’re counting on them to fill the financial hole caused by a glut of cheap economy seats.
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Premium cabin revenue increased at American, Delta, and United in the third quarter.
Airlines are counting on their premium cabins to help recover from the financial hole created by an influx of cheap economy seats that flooded the market earlier this year.
American Airlines on Thursday reported an 8% increase in premium revenue in the third quarter compared to the prior year. That increase, when capacity was only up 3%, suggests customers are willing to pay for upgrades, something the industry badly needs to get out of a rut.
Rivals Delta Air Lines and United Airlines reported similar premium revenue growth in the quarter, at 4% and 5%, respectively.
Andrew Nocella, United’s executive vice president and chief commercial officer, said on the company’s earnings call that the premium cabin “performed better than the main cabin in all entities during the quarter.”
Delta, for its part, said its premium cabins generated $5.3 billion in revenue compared to $6.3 billion for the economy cabin despite being just a fraction of the tickets sold.
Not all airline recovery is created equal. While United and Delta’s stock prices have risen 81% and 34%, respectively, this year, American’s has fallen 5%.
American’s lag is due, in part, to a failed corporate strategy that pushed away high-paying customers and resulted in the firing of its chief commercial officer, Vasu Raja.
“We have taken aggressive action to reset our sales and distribution strategy and reengage the business travel community, which we’re confident will improve our revenue performance over time,” American CEO Robert Isom said in Thursday’s earnings release.
Premium seats allow airlines to charge a premium
The legacy carriers’ renewed attention to their premium offerings is also due, in part, to their acknowledgment of an overall shift in customer expectations.
It’s a much-welcome change as airlines have scrambled to compensate for the unsustainably cheap economy seats from revenue-starved low-cost carriers, which have dragged down their earnings this year.
Leaning more into premium seats could fill that financial void.
American has doubled down on bettering its business class. It plans to launch a new Flagship Suite for future Boeing 787s and Airbus A321XLRs, which will also be retrofitted onto the airline’s existing Boeing 777-300ERs.
Delta has hinted at an unbundled business class to stoke more demand for its highest-dollar cabin. Meanwhile, United is planning to create a new lie-flat business class for its new A321XLRs. Each of the Big 3 have also announced big investments in their ever-important airport lounges.
On the budget side, Frontier Airlines and Spirit Airlines have yet to score a profit since 2019 and are making drastic changes to their historic bare-bones strategy. Frontier in March announced “business-class-like” seats that would leave the middle seat blocked, while Spirit revealed bigger and more spacious seat options in July.
JetBlue Airways recently announced lounges would be built for its Mint business class, and Southwest Airlines plans to upsell seats with more legroom — ditching its previous egalitarian model.
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