The Impact of Premium Economy Expansion on Corporate Travel Policies

Despite the partial federal government shutdown, U.S. travel volume was up 3.2% year-on-year in January. International and domestic business travel are both growing. As are the premium economy cabins of most U.S. airlines. 

Premium economy is a cabin distinct from economy or “economy-plus”, typically delivering a similar service to economy but with extra legroom, up-graded seating, better food and priority boarding. U.S. carriers have expanded premium economy availability on international routes.

In 2017 American and Delta both added premium economy cabins to their long-haul service, following the example of European and Asian carriers. American Airlines added premium economy to 100 out of 124 aircraft, giving the carrier the most premium economy cabins in the U.S. Delta plans to deliver its Premium Select cabin in all widebody flights by 2021.

Meanwhile, United Airlines has announced plans to retrofit over a hundred planes to add more premium seats on key routes. United will also deploy new, fifty-seat jets with mostly premium seats on some business-travel routes. It’s all intended to provide more space and better service to high yield (usually business travelers 

The expansion of premium economy cabins has been warmly embraced by the business travel community, with companies allowing many economy travelers to trade up as part of a general loosening of travel policies to support traveler well-being and productivity. Premium economy plays well in a changing travel management environment, where traveler satisfaction and a positive traveler experience are increasingly important

On the downside, there is confusion around what business travelers can expect from a premium economy product, and which airlines offer them. There are inconsistencies in premium economy products too, such as seats of variable width, which create confusion heightened by the economy seat up-grade options offered by some carriers. But despite the blurred lines and the inconsistencies, premium economy offers travel managers the opportunity to bridge the gap between business and economy.

That gap has gotten wider as legacy carriers respond to competition from Low-cost airlines by cutting back their economy products to a bare minimum. In doing so, this has made economy less attractive for long-haul flights. By comparison, premium economy offers added extras on a level with the business class of the late 90’s, but at a fraction of the price.

We predict that demand for premium class air travel will rise during 2019. However it is likely that we will also see significant fare increases across regional, transpacific and transatlantic routes. Last year, several carriers added surcharges to their business class fares. Despite adding capacity by retrofitting their 0planes, airline capacity will still be restricted, which will strengthen the carriers’ negotiating position.

There’s no evidence to suggest that travel policies will permit a return to the halcyon days of business class-as-standard. However premium economy offers a good middle-ground option that allows employers to treat their travelers better without busting the travel budget.

So where does this leave business and first class? The days of the latter appear numbered, with only twenty or thirty carriers worldwide offering traditional first class products. By comparison, business class has mutated into a quasi-first class product with lie-flat seats, high-end dining options and other amenities. Demand for ‘real’ first class travel has declined too, mainly because it is only VIP and high net worth travelers are the only ones prepared to pay first class fares. On many routes, airlines use first class as an up-grade for overbooked business class passengers. For others, first class is a status symbol used to impress press and stock holders.

There’s a limit to how far business class can evolve. New seat technology and clever use of space has pretty much maxed-out. So, the next battleground for competing airlines could be premium economy. But if that happens, the gap between economy and business will simply be replaced with a gap between economy and premium economy. 

With more business trips being made, the onus will remain on corporates to meet their duty of care obligations to their traveling employees by mitigating the impact of long-distance travel on well-being and productivity. Premium economy could well become the new economy. It will be interesting to see how low cost carriers react to that.