Number of premium passengers falling on European – and global – airlines
IATA said in December that the share of premium seats as a portion of total travel is contracting, with premium seat share falling back towards the lows of early 2009 when it touched 7.5% of total traffic. Also that there has been a degree of substitution away from premium travel to economy, as businesses seek to cut cost in difficult economic conditions. IATA said that Europe’s airlines had the lowest average profitability of all the world’s regions. So they want higher numbers of business passengers, which inreases profit. In January IATA said demand for premium travel had been weaker in the 2nd half of 2011, and on in some areas a contraction or slowdown in economic activity has reduced business travel. Also business travellers have switched from premium to economy, especially on flights within Europe. Airlines may ? normally depend on premium travel for around 30% or more of their income.
IATA notes contracting premium travel demand
The share of premium seats as a portion of total travel is contracting, with premium seat share falling back towards the lows of early 2009 when it touched 7.5% of total traffic, according to airline industry body IATA. Given the continued growth in economy travel, IATA believes it is probable there has been a degree of substitution away from premium travel to economy, as businesses seek to cut cost in difficult economic conditions.
This changing seat class mix will undermine yields, and hence profitability, with IATA also warning that stagnant international trade and declining business confidence points to further weakness in business travel and a challenging profitability environment for airlines in 4Q2011. IATA has previously commented on the increasing movement towards premium economy travel, which IATA includes as part of the ‘economy’ category. “In recent months, that structural downshift has been joined by the start of a new cyclical downturn,” IATA said last month.
In the same week that IATA noted the increasing trend of declining premium traffic, Cathay Pacific confirmed details of its new premium economy product, which will be progressively introduced on its long-haul services from Mar-2012. A number of carriers in the Asia-Pacific region – Qantas, Air New Zealand, All Nippon Airways, EVA Air, Japan Airlines, Thai Airways and Virgin Australia – have already introduced premium economy products in reaction to changing travel demand trends.
Premium passengers as % of the total (seasonally adjusted): Jan-2004 to Sep-2011
Source: IATA Premium Traffic Monitor Oct-2011
Expected demand weakness linked to economic woes
IATA has continually noted that weak levels of business confidence are usually consistent with little or no growth in premium travel volumes. Premium travel is also aligned with behaviour in international trade and business confidence.
International trade growth rates have been declining for an extended period now and actual trade values have remained relatively flat for some months, IATA noted. This will have implications on business related travel, signalling a period of “flat or no growth”. Business confidence has also been trending downward, with Oct-2011 data indicating a “degree of stabilisation, but at low levels”. “The implications for premium travel, which tends to follow the index by a matter of months, is a flattening in growth at best, with the potential for some decline,” IATA said.
Premium passengers and world trade growth: Jan-2006 to Sep-2011
Source: IATA Premium Traffic Monitor Oct-2011 sourcing IATA and CPB Netherlands
… and there is much more ….at
But then ABTN says :
European airlines boosted by ‘robust’ business travel
Europe’s airlines performed “strongly” throughout 2011 despite the second half of the year being dominated by the eurozone financial crisis.
Figures from IATA showed that European carriers had the second highest passenger growth rate last year at 9.5% – only Latin American airlines saw faster growth in 2011.
IATA said that “robust business travel” on long-haul routes had helped boost passenger numbers in Europe with the weak euro also fuelling demand. But the association warned that Europe’s airlines had the lowest average profitability of all the world’s regions.
Globally, passenger numbers grew by 5.9% in 2011 compared to the previous year although capacity rose by 6.3%, which meant a fall in overall load factors from 78.3% in 2010 to 78.1% last year.
Tony Tyler, IATA’s director general and CEO, said there were some “heartening developments” so far in 2012, such as improving business confidence and signs of recovery in the US. But he warned the eurozone crisis still could have “dire consequences” for the global economy.
“It is far too early to start predicting a soft landing for 2012. The eurozone crisis is far from over. Failure to achieve a durable solution will have dire consequences for economies around the world and it would most certainly tip the airline industry into the red,” said Tyler.
European airlines saw 9.8% growth in December although this was on the back of a 10.3% rise in capacity. It also compares against December 2010 when flights were severely affected by bad weather across much of northern Europe including the UK.
Tyler added: “Given the weak conditions in Western economies the passenger market held up well in 2011. But overall 2011 was a year of contrasts. Healthy passenger growth, primarily in the first half of the year, was offset by a declining cargo market. Optimism in China contrasted with gloom in Europe.
“Ironically, the weak euro supported business travel demand. But Europe’s primarily tax and restrict approach to aviation policy left the continent’s carriers with the weakest profitability among the industry’s major regions.
“Cautious improving business confidence is good news. But 2012 is still going to be a tough year.”
But only a few weeks earlier they said:
Economic woes taking toll on premium traffic
Demand for airline premium cabins is continuing to weaken as economic turmoil in the eurozone takes its toll on global trade, according to the latest global figures from IATA
The association said that while premium passenger numbers grew by 0.6% in November compared to October, demand has been dropping from the peak seen in spring 2011 – November’s total premium passenger numbers were down 2.6% on May 2011.
IATA added that “economy travel has generally been stronger than premium travel over the past six or more months”.
“On some markets, premium travel is weak because a contraction or slowdown in economic activity has reduced business travel,” said IATA in its monthly Premium Traffic Monitor for November 2011.
“In other markets, business travel continues, often linked to export business, but business travellers have switched from premium to cheaper economy seats.”
The report said that business passengers seemed to be switching to economy on flights within Europe with a 0.3% fall in premium traffic in November while economy numbers “remained relatively robust”.
The key North Atlantic route between Europe and North America also saw its second month of “weak year-on-year performance” on premium sales with growth of only 0.4% in November 2011 compared to the same month in 2010 which follows a drop of 1.5% in October.
“A route that had previously shown strength despite a weak European economy is now starting to slow,” said IATA. “Export momentum from German and northern European countries across the Atlantic has been slowing for some time now, and that could be translating to weaker premium travel performance.”
The report also shows a slowdown in premium travel within the Far East with November only seeing an increase of 0.4% year-on-year after recording growth of 4.1% in October and 13.9% in September.
“It appears the impact of the eurozone crisis is now manifesting itself in the Far East,” said IATA.
“Credit conditions are now also starting to tighten in Asia, and policymakers are reverting from tightening policies to constrain inflation, to looser policy positions that indicate a readiness to stimulate activity if necessary.”
The economic crisis has put pressure on British Airways as many businesses cut nonessential business travel in the hopes of lowering costs. British Airways has a focus on high level premium tickets and offers first class ticket holders access to premier lounges. The company relies on premium tickets for over 50% of its revenues, which is far above the 32% industry average. Thus, a drop in premium ticket sales will hit British Airways the hardest.
Premium products, especially internationally, are very profitable
Scott Mayerowitz writing for the AP points out that, “first-class and business-class passengers make up only 8% of international travelers but account for 27% of revenue.”