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Premium Economy Class - a suitable business model for your airline?

In recent years, an increasing number of airlines have introduced a Premium Economy Class that is positioned between Business and Economy Class. The initial aim was to attract business travelers whose company regulations no longer permit Business Class travel. These airlines are also keen to attract leisure travelers who are willing to pay a surcharge for a more convenient travel experience but who do not wish to pay the extra for a Business Class ticket.

There is no consistent definition of a Premium Economy Class in the airline industry other than that it is positioned between Business and Economy Class. These classes differ significantly from airline to airline, depending on the different target groups addressed, their expectations and their price sensitivity. The product features of the new class vary, and range from increased seat pitch, recline and/or width to special meals, additional baggage allowance and priority passenger handling. Furthermore, most airlines have given their Premium Economy product individual names, e.g. Economy Comfort, Economy Plus, Economy Extra, Premium Economy.

Given the growing interest among carriers in a Premium Economy product, Lufthansa Consulting has developed a method of assessing the economic viability of introducing one on an individual basis. The approach is mainly driven by the following questions: For which airline is a Premium Economy class a successful business model and why? Do the additional revenues that can be generated with a Premium Economy Class actually exceed the investments in product and services or compensate for the potential decline in Business Class revenues?

The financial feasibility of a Premium Economy Class depends to a large extent on the actual product features, which each airline needs to carefully define based on the target customer group(s) it plans to attract. Each feature must be evaluated. Is it simply “nice-to-have” or is the passenger actually willing to pay a surcharge to benefit from it? Furthermore, the cost of the extra feature needs to be balanced against the additional revenue that can be generated. For example, an airline needs to evaluate whether it can make up for the loss of revenue resulting from fewer seats due to a larger seat pitch in the Premium Economy cabin by charging higher fares for the respective class.

To support the financial evaluation of the introduction of a Premium Economy Class, Lufthansa Consulting developed a tool in collaboration with a group of MBA students of the University of Applied Sciences in Frankfurt. With the aid of this approach, the cost of introducing the new product and additional revenues it may generate can be assessed.

The tool allows airlines to determine the individual product features and cost of a planned Premium Economy Class, calculate the expected revenues and evaluate the optimum number of seats in each class, i.e. Economy, Premium Economy, Business and – where applicable – First Class. Furthermore, it ensures that the cost of reconfiguring the cabin plus additional ground times resulting from the new configuration and any cost savings due to the reduction in cabin crew needed are considered during the evaluation. Last but not least, the method helps airlines to set the minimum price and/or surcharge required to cover the additional cost of the new product.

Lufthansa Consulting’s approach combined with the tool helps airlines to carefully consider their prospects of success if they introduce a Premium Economy product, and takes both the related cost and the expected revenues into account. This allows airlines to avoid unnecessary risks and ensure that the new product is financially worthwhile.

If you would like further information about the Premium Economy product evaluation tool, please contact mail@lhconsulting.com.