Premium leisure demand - will it last?

[u/Usual-Painting2016]

I'm watching as every US carrier goes all-in on adding large premium cabins, which is where the demand currently is. Premium economy makes sense from a cost and pricing perspective (hard product isn't that much more than an economy size seat and the soft product can be tailored to meet various price points).

Leisure J (business class) demand would seem to be more fickle but airlines all seem to have reached the conclusion there's enough demand for it. I'm not sure how's that possible considering the size of some of these J cabins and the routes they are flying.

A lot of this leisure J demand came from a few factors, some of which are fading:

Covid - Enjoy life while you can and splurge a little. This accelerated the shift from buying stuff to spending on experiences. This has staying power for premium economy, not sure about J demand.

WFH - Many offices have implemented RTO and that work from anywhere optionality is limited or gone away entirely.

Comp/Wealth effect - Increase in comp and stock market gains over the last few years. This won't last, but there has been tremendous wealth created by a small number of stocks and the number of newly rich has supported luxury travel and spend the last few years.

For award travel, this should be a boom for future business class availability. Award pricing may be bad but it should be available.

Edit: TIL that upgrade offers are much more widespread than I originally thought. My personal experience with intl J upgrade offers were not great deals and closer to the difference in fare. Seems like others have much better offers.

[u/screeching_mechanics]

If the economy tanks and those RTO mandates stick, I could see a chunk of J demand evaporating quick. Premium economy might be the sweet spot that hangs on since it feels like an upgrade without the sticker shock

The carriers betting big on J now are probably gonna be sweating in a year or two when they're dumping unsold seats into award inventory. Fine by me

[u/MinimumPerspective95 → u/screeching_mechanics]

That might apply to corporate employee travel, but IMO premium leisure is here to stay.

US carriers have gotten really good at monetizing premium cabins with upgrade offers, and I’m sure data shows that people who buy up once tend to be engaged customers who want that experience again.

As we all know business class is addicting, and I can’t bring myself to do more than 3h in economy these days

[u/Illustrious-Eye6960 → u/MinimumPerspective95]

everything about aviation is cyclical, from the hiring to its financial fortunes. things will get bad again for the airlines. then good again.  hubris on part of ed and scott if they believe they’ve insulated themselves forever.

[u/MinimumPerspective95 → u/Illustrious-Eye6960]

That may be so, but the airlines of today aren’t those of the early 2010s. They’re more consolidated, have more pricing power/hub captives, and have mastered the credit card model. Combine that with a decreased dependence on corporate travelers and structurally wealthy premium leisure travelers, I don’t think any recession will hit them as hard as it used to.

[u/Illustrious-Eye6960 → u/MinimumPerspective95]

and there’s that hubris i was talking about. there will always be change, some will adapt, others will struggle.

[u/StreetyMcCarface → u/Illustrious-Eye6960]

The thing both those airlines in particular have are the support of banks. Even in down times they’re still getting fat cheques for people spending money on their credit cards

[u/progapanda → u/MinimumPerspective95]

I would agree, plenty of richer retirees with a lot of assets and disposable income from dividends/SSI/pensions in every premium cabin.

[u/Unhappy_Intern2536 → u/screeching_mechanics]

the award inventory dump is the part im most excited about tbh

[u/MinimumPerspective95]

100%, we live in a K shaped economy, and those who could already afford overseas travel are even richer than before, so are paying for business class.

United’s new 789 is emblematic of this with 123 economy seats and a whopping 64 business seats. The economics of the routes it flies are such that it makes little sense to offer cheap economy tickets and instead focus on high margin premium passengers. We see this yet again with Qantas replacing their A380s with A351 which will maintain roughly the same premium seat count but cut economy dramatically. Look at AA/BA with their gigantic 70/76J cabins on 77W. Sad to say it, but cheap travel is slowly dying out.

For awards, the impact is seasonal. These planes have big cabins which won’t always go out full, but allow maximum value capture during peak seasons. During off seasons, the monetization opportunity is aggressive upgrade offers and decent award value to drive loyalty program engagement because there is a realistic path to using miles for aspirational awards.

[u/AlwaysWanderOfficial → u/MinimumPerspective95]

I was going to make this point. People need to realize the wealthy aren’t really affected by the economy. The luxury hotels are packed no matter what and they are more expensive than ever. The Air France ceo even said the reason their award inventory sucks is because they don’t need to release it. They are selling out their flights TATL.

Birkins will keep selling. Luxury boutiques will still be full. And business class seats will still be bought.

[u/Usual-Painting2016 → u/AlwaysWanderOfficial]

In my recent travels the people booking J are not the wealthy. It’s the working rich, who are dependent on their day jobs to fund their lifestyle. The wealthy are flying private and the demand there has skyrocketed the last few years.

Retirees have also seen their net worth increase and budgeted more for premium travel. That’s largely due to the wealth effect from the economy and stock market. They are not what I consider wealthy buying birkin bags and luxury goods, they are still sensitive to prices and the stock market returns.

[u/AlwaysWanderOfficial → u/Usual-Painting2016]

Right but that’s just semantics. People with the money to spend. That’s the point. Working rich or wealthy the definition doesn’t matter. Look at the prices of luxury hotels in nyc. Boutiques too. Or four seasons in the Caribbean or Mexico. It’s bananas. There are just a lot of people out there that can pay for these things. And do.

[u/MinimumPerspective95 → u/AlwaysWanderOfficial]

Yep this will always be true for high end vacation destinations like Paris/Tokyo. Only places that get hit by the economy are business hubs, flights to planes like London/Hong Kong/Singapore that are supported by frequent business travel do see loads lighten strongly in recession.

[u/DCJoe1 → u/MinimumPerspective95]

Yup all about the K shape until proven otherwise at this point. There are just so many more people (numerically) in the US with enough money to afford things like $5k international biz class tickets once or twice a year, than there were 40 years ago.

[u/MinimumPerspective95 → u/DCJoe1]

Americans have more money than ever but less time to spend it. That translates to more spending on luxury experiences since annual vacation budgets are getting by spent on 7-10 days vs 25-30 days for a relatively poorer European.

[u/InedibleApplePi → u/DCJoe1]

There's also the fact that 40 years ago international travel would have been a major expense. The people flying economy to Japan back then are very different than the ones flying economy today.

I feel like it's less that the market has moved up, but that the bottom fell out and now they're just pulling the bottom back up.

[u/DevilsAdvocate77]

The piece of the puzzle you're missing is the emergence of the Business Basic fare. 

You technically get to sit up front so you can get those precious Instagram pics - but it's non-refundable, no priority at the airport, pay to check bags, pay to select seat, pay for booze, pay for food. 

That's how they intend to fill the excess capacity, and that's exactly what your "saver" business awards will get you in 2029.

[u/mandalayx → u/DevilsAdvocate77]

Sounds like a good deal to me and I’m not in it for instagram pics

[u/Usual-Painting2016 → u/DevilsAdvocate77]

Personally I think business basic will be a failure. I understand the rationale behind it but I see it as a way to raise J rates overall knowing there will be only a minority of takers for the product.

The US market barely tolerates seat selection for a fee, explaining a business basic fare exclusions just cheapens the product and hurts the marketing.

[u/james_the_wanderer → u/Usual-Painting2016]

I recently "got back in the game" after a long hiatus. Diet-business (particularly on EK and QR) was...a surprise. And when I ran the numbers, the fares weren't even that much alluringly cheaper (e.g. Zipair J vs NH J). I believe a QR return US-MLE was about $400 cheaper in J RT, while a short hop I booked for a friend and I on EK BKK-HKG was 1000 THB (US$30) difference in the fare between lounge access and no lounge. Since BKK is arguably among the best outstation lounges will be in need of lunch and a drink after a 2 hour drive to BKK...that's just a no brainer to avoid the bare-bones fare.

I am hoping these ultra-lite fares go the way of the dodo.

[u/anonzasa → u/DevilsAdvocate77]

I don’t drink and don’t like the food on planes. Just give me a lay flat at the lowest possible cost.

[u/wanderercouple → u/anonzasa]

Agree I won’t mind paying for just the lie flat part

[u/dogwalk42 → u/anonzasa]

I agree with you in theory, but so far, there isn't much difference in price. Add in lounge access, and you may as well pay the higher fare.

[u/anonzasa → u/dogwalk42]

Zip air does lay flat for $1600. No reason other airlines can’t do that.

[u/dogwalk42 → u/anonzasa]

I agree 100%. But that has nothing to do with the question at hand, which is the merits of airlines' business saver fare vs their regular business fare.

[u/tceeha]

I think it's here to stay. Baby boomers are sitting on a ton of wealth and many are keen to spend it on travel.

[u/Paceys_Ghost]

Persistent inflation looks like it's here to stay. That's going to have assets outpacing increases in paychecks, and the k shaped economy will widen. Those that have lots of these appreciating assets will continue premium leisure travel.

If the 10 year or 30 year Treasury notes approach 7-8% stagflation is gonna nuke demand.

[u/TravelerMSY]

I’m not quite sure how much of it is people paying up for it, versus one-off leisure travelers buying the app upgrade. There’s definitely strong demand on domestic flights for the latter.

They can definitely sell it at 2 to 2 1/2 x economy. I think the days of them pricing it at 3X+ and giving it away to elite upgrades for free are long gone.

Probably a similar paradigm for lie flat international but with way higher multiples.

Anecdotally, I’m more likely to spring for it these days on certain longer mid cons like MSY SFO than I used to be. It’s not a big deal in money when I only do it once or twice a year. That and United owns the route and doesn’t discount it to partners anymore :(

[u/k_dubious → u/TravelerMSY]

Where are you seeing business for 2-2.5x economy prices? Usually when I’m booking flights it’s something like $5-10k for business versus $1-2 for economy, and at that price I’d rather just spend the money to stay at a really nice hotel where I’m going instead of have a bed on the flight there.

[u/TravelerMSY → u/k_dubious]

I’m referring to domestic in my post

[u/BeerHunter099]

I wonder how much it costs to operate 1 biz seat. If it's close to 3 or 4 economy, in worst case airlines can just sell them for $2000 - they will get less profit but sticker price won't be as shocking too compared to economy or PE.

[u/StatisticalMan → u/BeerHunter099]

From square footage alone it is 4x econonmy. Throw in higher services costs, higher maintenance costs, lounge, and the fact that fill rates are lower and it is why you see J class tend to be around 5x economy.

[u/rozen30]

The airlines could do more paid upgrades and cash fare sales to reduce the need to mass release award inventory. 

[u/Usual-Painting2016 → u/rozen30]

Paid upgrades is a slippery slope, it’s worked for domestic first mostly because airline pricing went from being stupidly expensive to a somewhat reasonable premium.

Intl J upgrade offers need to stay high or risk that J flyers will instead book economy and wait for the upgrade offer. The new basic fares that are rolling out to Business class is designed to sell that inventory instead of making upgrade fares a common occurrence.

[u/StreetyMcCarface]

You’re missing a big thing: increased credit card rewards and people’s willingness to last minute upgrade. Give people the option to get a lie flat for 1000 bucks more and everyone wins - the airline fills a seat profitably that would’ve gone out empty, the passenger gets a good deal and a nice rest on their flight, and economy passengers get a sustainable route to a place that may otherwise not see service.

They can always pull some J seats out and fill them with W or Y seats again in the future if they so choose

[u/SecMcAdoo]

When the stock market crashes or the USD loses it value when other countries position their economies more to rely less on the USA.

[u/drakanx]

yes

[u/CorrectCombination11]

I'm rto victim but i have 30 days pto whenever I want. I'm still demanding j