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    View: Will premium economy fly?

    View: Will premium economy fly?

    View: Will premium economy fly?
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    By Satyendra Pandey   IST (Published)

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    Will premium economy fly? The positioning of the premium economy is a topic of hot debate. The physical product usually involves a dedicated cabin in the aircraft with fewer and wider seats depending on the airline. On the services side, there is usually an upgraded meal service and other perks such as additional frequent flyer points and higher baggage allowances.

    A recent newsbreak revealed that Air India intends to take up several aircraft on lease. Interestingly, this includes wide-body aircraft for international routes that will also have a new product. Namely: premium economy. While there is an ongoing debate on the reasons behind the introduction of the premium economy segment, the market trends have indeed seen this segment evolve especially after the pandemic. Yet, success is by no means granted and positioning will be critical to how this is taken up by the market. The question on everyone’s mind is: will premium economy fly?
    Premium economy is a relative proposition
    The positioning of the premium economy is a topic of hot debate. The physical product usually involves a dedicated cabin in the aircraft with fewer and wider seats depending on the airline. On the services side, there is usually an upgraded meal service and other perks such as additional frequent flyer points and higher baggage allowances. Yet, looking across airlines it is clear that for some the premium economy product is skewed towards the economy product and for others, it is skewed towards business. In other words for some airlines, it is positioned as an economy plus while for others it is a business minus. Consequently, this impacts the unit costs and the economics and thus capturing profit off this cabin becomes a tricky proposition.
    Premium economy by its very nature is ambiguous. And the length of the flight is a key consideration. On the shorter segment, the traveller segmentation is sharper with clear preferences on price and premium. And thus the success or lack thereof on shorter segments cannot be used as a proxy for the product's success. This is further evidenced by the fact that even the airlines that offer the premium economy product on long-duration flights only do it for certain sectors and certain cities. These cities have unique demand characteristics.
    The relative proposition of premium economy is perhaps best reflected in pricing. The anchor is usually the economy class fare or the business class fare. These fares serve as anchors and consumers then tend to determine whether to upgrade or downgrade to the premium economy offering. Price it too low and competitors can add giveaways to their economy offering and stop the spillover; price it too high and the value is lost. Effectively revenue managers have to work with stretching the willingness to pay. In an ideal scenario, it is the economy segment that needs to be enticed with the offering thereby capturing a premium.
    The market size depends on a host of external factors
    The market size of the premium economy cabin is hard to predict. This as it involves a host of external factors ranging from corporate travel policies to choice theory architecture. And the majority of these factors are outside the purview of the influence of airline management and are dependent on macro-factors. There is a very small segment that books directly into the premium economy. Most bookings involve looking at the other segments and then paying a premium or saving on cost. Airlines don’t want the latter as it effectively reduces the market size of already diminished business travel demand which has simply not returned in the same form and fashion as it was pre-pandemic.
    By way of example, looking at India-UK and India-US markets on direct flights, the combined yearly revenues for these markets are estimated to be just north of $400 million. Of this, the business travel demand ranges from 32 percent — 36 percent while the premium economy demand averages 12 percent — 18 percent. The large variations indicate the seasonality within the booking patterns. The premium economy market share takes from both segments. Orthogonal estimates indicate that the market size of this product in the India-US market alone stands at $70 — 80 million but the challenge is that this can go either way depending on consumer sentiment, demand patterns and offerings by competitors.
    Success depends on the ability to generate profits
    In the final analysis, success depends on the ability to generate profits. All too often there is only anecdotal evidence on the success or the failure of a product and to be sure configuring aircraft is an expensive proposition. This premium economy offering has to be planned years ahead. Furthermore, while the premium economy does command a premium, it often translates to a higher unit cost per seat across the entire aircraft. And the ability to sell the segment depends on both length of the flight and the network it feeds into. Where this is lacking success can be elusive.
    Pricing is a key determinant for the success of the premium economy offering. In an industry where your pricing is only as good as that of the competitor, it is not beyond belief that some airlines could start pricing their business product at premium economy levels. Indeed as newer aircraft come online including the extra long-range narrowbodies, the competitive dynamics may intensify even further. Other tactical pricing measures like upgrades to the cabin can also backfire and indeed some airlines have sold upgrades at prices that perplex even the most seasoned travellers. And with the ever-informed consumer, airlines risk losing firm bookings in business to anticipated paid upgrades.
    The decision by several airlines most notably Emirates to launch premium economy is often cited as evidence that the product is here to stay. And rightly so given the changing needs of travellers, the increased segmentation and also a gradual preference towards direct flights. But such analysis often overlooks the product in the context of the overall experience which includes the network, the airport and other offerings.
    Overall, as it stands the premium economy product is ripe for disruption. How this will evolve across the Indian market remains to be seen.
    —Satyendra Pandey is the Managing Partner for the aviation advisory firm AT-TV. Views expressed are personal
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