How Airlines Make Huge Profits From Premium Economy

How Airlines Make Huge Profits From Premium Economy

Airlines have found a new way to generate substantial revenues and profits – premium economy class. This cabin class, which falls between regular economy and business class, allows airlines to tap into travelers’ desire for a more comfortable flight experience without having to provide the full luxury service of business class. In many cases, airlines are charging up to twice as much for premium economy seats compared to regular economy, while costs are only marginally higher. This article will explore how premium economy has become a cash cow for airlines.

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The Rise of Premium Economy

Premium economy class first emerged in the early 2000s as more airlines realized there was a market for an upgraded economy product. While business class was out of reach for many travelers, economy class was becoming increasingly cramped and uncomfortable due to airlines packing in more seats. Premium economy was designed to fill this gap – for a premium over economy fares, passengers got around 5-7 inches of extra legroom, wider seats, better recline, and amenities like priority boarding and onboard dining.

Initially premium economy was limited to international flights and a handful of airlines like Virgin Atlantic and Air New Zealand. But over the past decade it has exploded in popularity and become a staple offering for most major international airlines. Domestic US airlines have been slower to adopt premium economy, but even they are now introducing it on more aircraft – American Airlines now offers it on over 200 jets, while United aims to have it on its entire widebody fleet by 2025.

The expansion of premium economy has corresponded with an overall decline in business class demand. Premium economy allows airlines to capture extra revenue from economy travelers willing to pay more for comfort, rather than relying solely on filling expensive business class seats.

Higher Yields with Minimal Extra Costs

One of the key reasons premium economy is so lucrative for airlines is the high revenue premium they are able to charge with minimal extra costs. According to aviation data provider Cirium, the average premium economy ticket globally costs around 2.5 times more than an economy ticket. For a hypothetical $800 economy fare, airlines are able to rake in around $2000 for premium economy while costs are only marginally higher.

Most of the hard costs involved in a flight are the same regardless of cabin class – fuel, pilots, maintenance etc. The only significant additional costs for premium economy are catering, lounge access for passengers, and wear and tear on wider seats. Many airlines simply take economy seats and replace them with premium economy seats with more legroom and width. This incremental cabin reconfiguration costs relatively little compared to outfitting lie-flat beds and other amenities in business class.

Additional crew are not always required either. On some aircraft, the same crew members can serve both economy and premium economy. Minor product enhancements like welcome drinks, amenity kits and improved meals account for the bulk of extra premium economy costs. But with fares two to three times higher, it is a very profitable proposition.

While economy fares are largely driven by competition and aim to fill seats, premium economy allows airlines to tap into people’s willingness to pay for more comfort. Ancillary revenues from premium seat assignments and onboard purchases also boost profitability.

Strong Demand Among Business Travelers

A key traveler demographic that airlines are targeting with premium economy is small business and corporate travelers. With many companies cutting travel budgets in a challenging economic climate, paying for business class is no longer an option for some employees. Premium economy provides a more professional flight experience for such business travelers compared to crowded economy cabins.

Surveys indicate that small business employees and middle managers represent a major share of premium economy passengers. With many private aviation options also unaffordable, premium economy on long-haul routes enables this segment to stretch travel budgets while remaining productive on board.

Companies themselves are also favoring premium economy when booking employee travel, upgrading select staff from economy if budgets allow. Compared with business class, premium economy still represents material savings especially when booking multiple employee travelers. For budget-conscious corporations, it is a business-friendly cabin class.

Airlines market premium economy specifically toward corporate travelers for this reason. Onboard amenities like fast WiFi, AC power outlets, and extra recline/width for working on laptops make premium economy a branded intermediate solution for business flyers. This is a lucrative and growing travel segment that airlines are keen to capture.

Upselling During Check-In Process

In addition to selling premium economy seats directly, airlines also leverage opportunities to upsell economy passengers to the premium cabin at check-in. Agents are instructed to offer premium economy upgrades to travelers that qualify based on frequent flyer status or fare type. Even if only a small percentage take up the offer, this significantly boosts ancillary revenues.

Airlines use intelligent algorithms to determine which economy passengers are prime targets for upgrade offers. For example, a frequent traveler on a discounted economy fare is likely to be willing to pay extra for premium economy rather than enduring a long flight in a cramped seat. Business travelers on expense accounts also routinely get upgrade offers at check-in.

The premium charged for such upgrades is usually quite profitable for airlines. Say an economy ticket costs $500 – the airline might offer an on-the-spot upgrade to premium economy for an additional $200. While the total ticket value is still under the ~$2000 average premium economy fare price, it delivers a large profit margin to the airline.

Check-in upgrades are also beneficial for passengers that want confirmation of a better seat. Relying on premium economy award upgrades or bids involves uncertainty, whereas check-in upgrades provide instant confirmation. Airlines leverage this desire for certainty to generate incremental revenue through mutually beneficial upselling.

Strong Leisure Travel Demand

In addition to corporate travelers, premium economy is also extremely popular among leisure flyers, according to airline executives. After enduring lockdowns and travel restrictions during COVID-19, many people are splurging on premium economy for vacation trips and long-awaited family reunions. With budgets still tight amid high inflation, premium economy provides an affordable way to enhance these special trips.

Compared to being squeezed into cramped economy seats, the comfort of premium economy is worthwhile for once-a-year leisure travelers. Having extra amenities and space makes long flights more bearable and improves the overall travel experience. Airlines actively promote premium economy with marketing highlighting the superior leisure experience it provides.

Leisure travelers are also very receptive to premium economy upgrade offers at check-in. To cash in on this demand, airlines price premium economy promidently alongside economy during bookings. Images of spacious premium seats are used to tempt leisure customers into upgrading. While families may initially book basic economy to save money, airlines generate substantial extra revenue by upselling upgrades at check-in and during the booking process.

With return leisure travel demand booming, airlines are doubling down on premium economy to tap into this sentiment. The combination of infrequent travelers wanting more comfort and affordable indulgence makes premium economy a perfect product for leisure markets. This complements demand from corporate travelers.

Tactical Use of Cabin Layout

How airlines configure premium economy seats on aircraft is also optimized for profitability. Airlines know that front cabin locations are most desirable for passengers. By placing premium economy right behind business class, airlines can charge higher fares compared to the back where regular economy is located.

On widebody jets like the Boeing 777, airlines rarely install more than 4-5 rows of premium economy seats. Limiting supply allows them to preserve scarcity value and sustain higher ticket prices. Airlines would rather install more profitable business class seats upfront than flood the cabin with premium economy seats.

Another tactic employed on some widebodies is to place premium economy immediately behind business class on one side of the aircraft only. This forces economy flyers on the other side to directly view the wider premium seats for the entire flight, incentivizing upgrades. It also isolates premium economy from the masses back in economy to elevate the experience.

On narrowbody aircraft used for domestic routes, airlines optimize layouts by inserting small premium economy cabins in the first few rows. For example, American Airlines configures its 737-800s with just 9 premium economy seats directly behind first class. This premium positioning helps drive demand for upgrades.

Bundling With Loyalty Status

Loyalty programs are also leveraged by airlines to help sell premium economy seats. Top-tier elite status tiers in frequent flyer programs typically confer access to enhanced economy seating products. Airlines market this as a key benefit to spur loyalty.

For example, Delta offers its Diamond Medallion members complimentary access to premium economy seating. This allows the airline to fill premium seats with loyal customers while earning their ongoing business. Delta markets Diamond status by highlighting the premium economy upgrades it provides.

By reserving premium economy for elite status flyers, airlines create further scarcity and exclusivity for the cabin class. It adds to the appeal for leisure travelers to redeem miles or pay for premium economy when booking. Bundling premium seating with loyalty programs is an effective tactic for airlines to boost overall uptake and revenue.

Strong Profits Despite Downsides

While premium economy is hugely profitable overall, there are some downsides airlines need to manage. Business class customers sometimes complain about the close proximity to premium economy diluting their experience. Cabin crew workload is also increased trying to serve two cabins instead of one.

Nonetheless, these issues are minor compared to the earnings power of premium economy. Most airlines are trying to add more premium economy seats across their fleet to reap the substantial profits on offer. Even low-cost carriers like AirAsia X see premium economy as the future, rolling out cabins across their A330 aircraft.

Given the high returns, airlines are investing heavily in marketing premium economy and product enhancement. Consistent, positive customer experiences will be important to sustaining long-term demand. But as a profit engine, premium economy has firmly established itself as one of aviation’s biggest commercial successes over the past decade.

The Future of Premium Economy

Looking ahead, premium economy is expected to continue growing rapidly in scale and profitability for airlines. More US domestic carriers will likely roll out premium economy cabins to compete with Delta and American, which already unveiled plans to retrofit much of its fleet.

Economic challenges may dampen business class demand, driving airlines to expand premium economy instead. Carriers will update premium economy seats with even more comfort like extendable leg rests as seen recently on Air New Zealand. Larger premium economy cabins are also expected on new generation aircraft like the Boeing 777X.

With low-cost competition intensifying, premium economy will be an important differentiator helping full-service airlines like British Airways maintain profitability on economy travelers. Used tactically, premium economy cabins have high earnings potential that airlines are only just beginning to tap into. This makes premium economy the new sweet spot in airline cabins.

Frequently Asked Questions

Here are some common questions about airline premium economy cabins:

How much more legroom do you get in premium economy?

Legroom in premium economy ranges from 5-7 inches more than standard economy. Seats are usually around 38-40 inches pitch compared to 31-33 in economy.

Is premium economy worth the extra cost?

For long-haul flights over 4+ hours, premium economy is often worth paying extra for significantly more comfort. On shorter flights the upgrade price may not be as justified.

Do premium economy passengers get lounge access?

Lounge access policies vary by airline. Some provide premium economy flyers full or discounted lounge access, while others do not include it.

What amenities do you get in premium economy?

Typical premium economy amenities include priority boarding, welcome drink, enhanced meals, amenity kit, extra cabin service, premium headphones and improved entertainment screens.

Can you upgrade to premium economy at airport?

Many airlines offer premium economy upgrades at check-in if seats are available. You can also make requests to gate agents at boarding time if unsold premium seats remain.

Is premium economy available on domestic flights?

While less common than on long-haul, premium economy is expanding domestically. Delta and American offer it on some domestic narrowbody aircraft in the US.

Do all airlines have premium economy?

Most major international carriers now offer premium economy. In the US, the “Big 3” (Delta, American, United) offer it but some budget airlines like Southwest still do not.

Is business class better than premium economy?

Business class offers lie-flat seating and other luxury amenities exceeding premium economy. But premium economy provides major upgrades over economy at a lower fare.

Can you use miles to upgrade to premium economy?

Many frequent flyer programs let you redeem miles for premium economy awards and upgrades. Availability varies based on elite status level and route.

Is premium economy safer than regular economy?

All cabin classes on major airlines have equivalent safety standards. Premium seats do not provide additional safety over economy seats on the same aircraft.