American Airlines announced Wednesday that it would launch a new "Premium Economy [cabin] on its international widebody fleet. Premium Economy will be available in late 2016." Amenities will include:
- More legroom
- Wider seats
- Personal on-demand entertainment
- Noise reducing headphones
- Priority check-in and boarding
- Checked baggage allowance
- Amenity kits
- Enhanced meal service
- Spirits, beer and wine
Premium Economy will launch first on the Boeing 787-9s that are slated for delivery in late 2016 as well as on upcoming Airbus A350 aircraft. The new product will also be retrofitted on "all Boeing 777-300ERs, 777-200ERs, 787-8s and Airbus A330s over the next three years," but not on 767-300s that are scheduled for retirement. You can take a virtual tour here.
Premium Economy likely means premium price
American is the first U.S. carrier to introduce a true premium economy, though international carriers already offer such products. The seats look much like those of domestic first class. While pricing has not yet been announced, the new cabin, being effectively domestic first class, will likely carry a significant price premium. Unlike a few extra inches of legroom in Main Cabin Extra, Premium Economy is a significantly upgraded experience from Economy, so prices likely won't be a bump of a $100-$200. One Mile at a Time has done an excellent comparison of economy and premium economy fares for two international airlines and the price increase is significant.
As a pricing professional, I can appreciate how American is segmenting its customer base with this new mid-tier product. I am sure American has market research that shows a sufficient percentage of customers that are willing to pay a premium over standard economy, though perhaps not the full step up in price that business class would entail. Offering more granularity in pricing tiers allows a business to capture more of that willingness-to-pay, thereby enhancing overall revenue per passenger. While the larger seats will reduce total aircraft capacity, the additional revenue should significantly outpace lost standard economy fares as well as the incremental costs of Premium Economy. The result would be higher per-flight margins.
What about upgrades?
Another benefit to American, though not to customers, could be how a new cabin impacts upgrades. One Mile at a Time raised this question in a post yesterday. While no solid information is available, limiting upgrades to a single cabin would have two benefits to the airline. First, it would incent frequent flyers with upgrades to purchase paid Premium Economy at the higher fare in order to upgrade to Business. Granted, once in booked into Premium Economy, the marginal benefits of Business diminish and willingness-to-pay for Premium Economy could diminish, meaning some flyers could simply use an upgrade to bump up to Premium Economy. Another possible benefit could be increasing paid business class.
If demand for Premium Economy is strong enough, either via upgrade from Economy or purchase, being able to ultimately upgrade to Business could become quite difficult. Some could then opt to simply purchase paid Business. Granted, to increase the number of customers with willingness-to-pay for Business class fares, American might have to slightly reduce prices in this cabin. However, if enough Business seats are converted from upgrades to paid, this would also enhance revenue. A Delta insider told me earlier this year that judicious application of pricing techniques was a key driver to driving a higher proportion of paid premium seats.
I can see how these changes, if they happen, could irk frequent flyers accustomed to upgrades. There has been much gnashing of teeth over the increased difficulty of using upgrades at Delta. However, at the end of the day, Delta is doing very well financially and American (as well as United) have to keep up. What better way than to mimic what is working for a competitor?
Is Delta on the verge of announcing a similar premium economy cabin?
When I initially read the rumors of American's announcement, my first thought was could Delta soon make the same move? Delta recently announced that Comfort+ would become a fare class of its own for domestic flights rather than an enhanced seating option in Economy. Note that this was for domestic flights only. It seems very logical to me that a new international premium economy could be slotted in as a new fare (and product) between Main Cabin and Delta One for international flights. I would imagine that whatever IT changes had to be made for the Comfort+ fare would also support a premium economy offering.
Delta could continue to treat Comfort+ as a seating option internationally as American appears to be doing with Main Cabin Extra. This could avoid the situation of having three distinct economy fare tiers. Granted, I am not sure which is more confusing: treating Comfort+ differently between domestic and international or having three international economy fare classes. In fact, One Mile at a Time noted in its article about upgrades there are rumors that Delta will announce a similar product as early as today. That post is worth a read if for no other reason than gamesmanship of the rumored maneuverings between American and Delta in launching these products.
The key takeaway
There are numerous unanswered questions regarding what airline will offer what, what those offerings will cost and the ancillary impact to customers. What is clear is that the competition for international travel continues to get more intense. The in-flight experiences of many international carriers are jaw-dropping. As these competitors continually attempt to one-up each other, these offerings get more amazing. To remain competitive with these international airlines, U.S. carriers have much work to do. The introduction of a Premium Economy cabin is just one step, and we can only wonder what the U.S. Big Three have planned to close more of the gap. As opposed to suggesting that U.S. carriers mimicking one another is a sign of reduced competition, I see these forthcoming changes as signs that global competition is causing all airlines, U.S. and international, to up their game, leaving me to say, isn't competition a great thing!