How do you convince customers to buy your premium product? For most companies it generally involves hyping the value proposition. For airlines it can also mean making a case for conspicuous consumption or speaking to the premium value realized from better catering, ground handling and the onboard experience. And then we have United Airlines’ CFO John Rainey. His approach is rather different.
Speaking last week on Bloomberg’s Street Smart (see minute 1:30) Rainey suggested that perhaps the First Class and Business Class products are similar.
When United merged with Continental, United had a three-cabin plane, while Continental had a two-cabin plane, noted Rainey. “We asked our customers for feedback on what they want and we see what people want to purchase and we’re moving to a two-cabin plane with Economy Plus. So you’ve got Business Class, Coach and Economy Plus. Typically that’s what the customers that we fly really are looking for.”
When further asked if Business and First are generally the same, Rainey agreed strongly. “There are customers that will simply book First Class because it is First Class but it’s effectively the same service. You’ve got a very similar product, a very similar seat. Even the food service is very similar.”
And here’s the rub: He’s not wrong.
Certainly for United’s product the spread on meals is almost nil; ground and inflight service are not much different either. Some premium customers might suggest that United’s Global First has seen a decrease in quality over the past few years but that’s much less significant than the increase in value that full-flat Business Class has brought into the market. It is much harder to convince passengers to buy the premium product when the next option down is sufficient, and has the same ability to lay fully flat.
Stories discussing the death spiral of First Class have been circulating for years now; United is not the only airline with executives making such comments. Christoph Franz, former CEO of the Lufthansa Group spoke out last year against flat beds in Business Class vis a vis First Class cabins. Even as some airlines add opulent premium products such as Etihad’s Residence suite, there are also cuts happening within similar markets. Singapore Airlines, Emirates, Qatar Airways and others are reducing the number of First Class seats they offer across their fleets. These carriers considered to be atop the First Class world and even they are seeing slack in demand.
A significant difference for United (and the other US carriers) versus their competition in the shrinking First Class market comes in the space between Economy and Business Class. Premium Economy is the latest salvo in the game, a product sufficiently more comfortable to justify a reasonable premium on fares but not so expensive that travel budgets are blown. But US carriers have taken a very conservative approach to the Premium Economy space. They generally offer extra pitch but not a truly separate cabin with different service levels.
Lacking any innovation at this tier while also cutting at the top fulfills Rainey’s view: No one is buying the product because there is no compelling reason to do so. Rainey has never been shy about speaking his mind, so maybe this is United’s new approach to the market.