Do Airlines Make Money From First Class?

First class air travel has often been
a playground for the rich and famous. On a first class flight from
New York to Dubai on Emirates Airlines, wealthy passengers can sleep
in private suites that feature floor-to-ceiling sliding doors, relax in
the Airbus A380's shower spa and drink limited edition champagne
while eating mounds of caviar. If you wanted to book that roundtrip
flight on Emirates at the last minute, it could cost
you over $23,000. Flying to Mumbai from New York? Etihad Airways offers a three-room
luxury suite called The Residence, which features a private bathroom, a
private living room and a personal butler. Flying roundtrip on Etihad for that
flight could be over $36,000. And, for about $3,000 on an
American Airlines Flagship First flight from New York to Los Angeles,
travelers have access to an exclusive check-in area and premium wines
in the flagship lounge.

While airlines make a significant amount
of money packing people into coach like cattle, premium cabins like
business and first class are still a major source
of income for U.S. carriers. The U.S. airlines are doing
quite well, frankly. Their margins range from the
mid-single digits to the mid-teens presently. Delta has been the
leader for quite some time. So why are first
class tickets so expensive? And who is paying for them? And with changes in technology
and environmental issues at the forefront.

Will the first class airplane
ticket even be around the next 20 years? The world's first passenger airline
started service on January 1st, 1914 between St Petersburg
and Tampa, Florida. It lasted only a few months and only
flew in good weather but set the stage for the future
of passenger travel. Around that time, airplanes were
flying mostly mail and passenger service was virtually non-existent. With big improvements in aircraft
performance and aviation technology in the 20s, 30s and 40s, passenger
service took root and started to expand. Before the 1950s, everyone who flew flew first class
because it was the same service for everybody on the airplane. The vast majority of people who
flew were affluent, mostly male, mostly business people who are
flying for business purposes. But, the end of World War II brought
about a big change to the air travel industry. What happens is after
World War II, there are lots and lots of surplus
airplanes out there. And there are a number of
veterans in particular who wanted to continue to fly, to
make money from flying. New carriers called non-scheduled
airlines, similar to charter flights began appearing, posing a
direct threat to the existing airlines that were
heavily regulated.

Working together gave non-scheduled airlines
the ability to offer lower prices on cross-country trips,
pressuring existing carriers to drop their fees. To attract the tourist class, the
existing airlines came up with a pricing structure of different
costs for different seats. Eventually, the airlines work with
the CAB to essentially undermine the non-sked's by creating a
tiered passenger ticketing system where you would have first class and coach,
that would be closer to the prices that were offered by the
non-sked's to attract the middle class folks. By the end of the 50s,
with improvements in technology, airplanes moved from the piston
engine to jet engines. The bigger Boeing 707 allowed
airlines to reconfigure their cabins, giving more amenities and space
to first class fliers. In January 1970, Pan Am flew the Boeing
747 for the first time on a flight from New York to London. The double decker plane known as the
Queen of the Skies, featured a restaurant with luxury services
for first class passengers. The introduction of the 747 really took
first class to a whole other level, very premium service with yes,
a lounge, a bartender, they called it a piano bar, it was
actually an organ but you had live music on these flights.

And deregulation in the 1970's may have
had an even bigger impact on the airlines. In 1978, the
Airline Deregulation Act removed some government controls, giving the airlines
more say over the services they offer and the
fees they could charge. Well, business class comes
about because of deregulation. The airlines now can compete any
way they want to compete. And with the rise in the business
class, airlines look to offer even better services to attract high
paying first class customers. For example, in the mid-1990s,
British Airways introduced fully reclining seats into their
first class cabins. American carriers later followed with their
version of the flat bed seat. American Airlines generally follow
the lead of others. They will pioneer technology
like they computerized reservation systems. But in terms of service
and amenities, the United States generally follows the lead of what
happens elsewhere in the world. Then, in the 90s and 2000s,
the airlines faced additional competition for first class customers
from private jet companies.

If you've got your own plane or
your corporate plane, you don't have to go through the security hassle. The airlines and the airports then have
to try and answer that with a better experience, not only in the airport,
but in the air for these folks to keep them flying commercial
rather than shifting to private. U.S. legacy carriers, Delta Air
Lines, United Airlines and American Airlines make a lot of their money
at the front of the plane, specifically, according to analysts, selling
business class and first class tickets on long
haul premium heavy flights. In August 2019, more than 6.4 million people flew in premium seats
on North American flights, about nine percent of the total
67 million seats occupied. But why are some
premium seats so expensive? The airlines are getting much
more sophisticated and they're getting to the point where they can charge
just the amount of money it needs to fill those seats.

That's how they make their money. It's butts in seats. The airlines use a strategy
called airline revenue management to maximize profitability. Essentially prioritizing passengers
based on fares. So airline revenue management, this is
how airlines make their money. This is how they know whether to
charge a business traveler a lot for a seat for a last minute flight. Airlines use algorithms to try to find
out the most that they can get out of passengers. Business travelers,
for example, tend to book their tickets at the last minute,
giving airlines the ability to charge more. They can make more money
selling a last minute ticket to a business person than they can
for people who are booking for leisure travel.

For people who are
booking for leisure travel, they shop for those tickets. For the business traveler, though, especially
the one who is flying at the last minute. They don't have that luxury. There's a seat. Here's the price. They pay it. But even though airlines
can make a hefty profit on first class travelers. Not everyone pays the full price. First class has changed a
lot over the years. So airlines, including Delta, has actually
said we used to give away almost all of our first class seats,
they were free upgrades to some of their most loyal customers. And that's been one of the big
changes we've made in our marketing strategy over the last
number of years. You know first class, we used to
get first class away to just about everybody and our loyalty arrangements but
today we sell about 50 percent of first class seats. They'll give away about 50 percent
in terms of loyalty upgrades, but about 50 percent is sold. In 2018, premium class travelers made up only a
handful of the total number of international origin-destination passengers
at 5.2 percent, according to the
International Air Transport Association.

But they accounted for a big
chunk, nearly a third of airline revenue. Industry consolidation and
a strong economy in recent years has allowed the airlines
to invest in more fuel efficient planes with better cabins
focusing on those premium classes. In 2008, Northwest Airlines
merged with Delta Air Lines. In 2010, Continental Airlines merged
with United Airlines and in 2013, U.S. Airways and American Airlines
parent AMR merged. Since the economy is pretty good,
airlines are putting a lot of resources into improving those
business class cabins. They're putting in these suites
that have sliding doors, they're improving their food and they really
need to compete with the international carriers, which have had
a pretty plush product to begin with. In addition to a few
other big markets, American has its Flagship First program for first
class and business travelers from New York to Los Angeles, that
offers quick passage through security, a first class lounge
and lie flat seats. The Delta One service is available
on long haul international flights and in select long
haul domestic markets. It offers a 180 degree flat bed
seat with a full height door. And United, offers their premium
transcontinental service that has a fully flat bed with more than six
feet of sleeping space and a fifteen inch monitor.

Those cabins are the
face of the airline. Even though most passengers can't
afford them, the expensive first class suites entice travelers to rack
up loyalty points for a chance to fly up front. And those premium services have been good
for the bottom line of U.S. legacy carriers. Airlines in the U.S. at least are headed to their
tenth year of profitability it's the longest stretch that we
know on record. For its quarter ended June 2019,
Delta announced operating revenue of $12.5 billion dollars, $1 billion
higher than the previous year. According to the company, the revenue
hike included a ten percent increase in premium
product ticket revenue. And in the quarter ended September
2019, Delta had revenue from their main cabin of $6 billion and
an additional $4 billion from their business, cabin and
premium products.

American and United did not report
the amount they make from their various cabins. CNBC reached out to
both airlines to request this revenue breakdown, but they declined to
share this data with us. On a plane, every square inch is
valuable real estate and first class seats take up a lot of space. With improvements to business class in recent years, there's been a
shift by some airlines away from first class cabins. Traditionally, the first class cabin has
been the home of the 180 degree flat bed seat, while business
class passengers had to contend with adjustable head
and foot rests. But in January 2000, British Airways
announced they would offer a full, flat bed in business class on
their London to New York route. First class is now internationally become
the sort of hybrid of first and business class and airlines, United,
Delta, American have kind of collapsed the two. And low cost carrier, JetBlue, is also
trying to grab a slice of the business class market.

In April 2019, JetBlue said it
intends to start multiple daily flights from New York to London, flying
the long range version of the Airbus A321, which will include
its premiere service called Mint. That's JetBlue's version of business class,
except tends to be much cheaper than the competition. The price of business class seats
has come down, and that's partly because of airlines like JetBlue
that have cheaper products out there.

And then there's business
class little brother premium economy. There's actually a new class of
service, at least new to the American carriers that's called premium economy,
it's sort of like a business class junior. And that's for people who can't
afford maybe business class and the lie flat seat. According to Skyscanner,
a premium economy ticket is about 65 percent less than the
price of a business class ticket. Changes in technology and environmental
concerns also pose a challenge to first class travel. Today, private jets fly faster and
longer distances than ever before. Instead of spending tens of thousands
of dollars on first class commercial tickets, companies now have
the option to charter a private jet or use fractional
ownership, where several unrelated parties share in the
purchase of an airplane.

Several companies sell part ownership
of private business jets, including Netjets owned by
Warren Buffett's Berkshire Hathaway. There is that one percent, that segment
of the market for whom the private jet is just
the ultimate convenience. You can fly when you want. It is essentially all
first class service. Changing technology could also impact
the decision on whether companies decide to purchase a pricey
first class ticket in the first place. Why fly thousands of miles
to distant places when Skype, Zoom or virtual reality will do? And for companies trying to
burnish their green credentials, flying first class might be bad
publicity and bad for business. Airlines are deeply challenged
by climate change. They are the big emitters. The automobile market is
moving to electric cars. There is no electric airplane out
there, according to the Air Transport Action Group. About two percent of human
induced carbon dioxide emissions worldwide come from air travel. And people who fly first class
have a bigger carbon footprint than the average passenger. As much as seven times as
large, according to the World Bank. But even though airlines are decreasing
the amount of space they are allocating for first class
travelers, carriers including Delta, United and American, for the time being, have found
big profits in premium cabin services.

It's not about maximizing the amount
of revenue on a plane, it's about optimizing the plane, getting the
price points right, and then getting the seat and configurations to
match what you're trying to sell..

As found on YouTube

Do Airlines Make Money From First Class?

Delta Air Lines, United Airlines and American Airlines make a lot of their money at the front of the plane. A strong economy and industry consolidation has allowed the airlines, in recent years, to invest in more fuel efficient planes with better cabins focusing on premium classes. One focus has been rethinking business class. First class internationally and on some key domestic routes has become a hybrid of first and business class.

As of November 2019, if you wanted to book a first class round trip flight on Emirates from JFK to Dubai at the last minute it could cost you over $23,000.

Flying from New York to Mumbai? Etihad Airways offers a three-room luxury suite called The Residence which features a private bathroom, a private living room and a personal butler. Flying round trip on Etihad for that flight could be over $36,000.

And, for about $3,000, American Airlines Flagship First fliers can go from New York to Los Angeles with access to an exclusive check-in area and premium wines in the flagship lounge.

While the airlines make a significant amount of money packing people into coach like cattle, premium cabins like business and first class are still a major source of income for U.S carriers.

» Subscribe to CNBC:
» Subscribe to CNBC TV:
» Subscribe to CNBC Classic:

About CNBC: From 'Wall Street' to 'Main Street' to award winning original documentaries and Reality TV series, CNBC has you covered. Experience special sneak peeks of your favorite shows, exclusive video and more.

Connect with CNBC News Online
Get the latest news:
Follow CNBC on LinkedIn:
Follow CNBC News on Facebook:
Follow CNBC News on Twitter:
Follow CNBC News on Instagram:


Do Airlines Make Money From First Class?

Leave a Reply

Your email address will not be published. Required fields are marked *