The Economics of Airline Class

Summary

This Wendover Productions video explores the economic factors shaping airline seat classes, from the Concorde's influence to the premium-heavy focus of today's airlines. It reveals that premium cabins generate the majority of airline revenue, with 45% of passengers accounting for 84% of income. The video also delves into the historical development of airline classes, from the luxury of early commercial flights to the cost-cutting measures that made air travel accessible to the masses. It discusses how deregulation and the Concorde's failure led to the optimization of business class, and the current trend of airlines phasing out first class in favor of more lucrative business class seats.

Takeaways

• 💸 Economy class is not the primary source of revenue for airlines; premium cabins generate more profit.
• 💺 The premium economy, business, and first-class cabins account for a significant majority of an airline's revenue, despite fewer passengers.
• 🚀 The failure of the Concorde supersonic plane influenced airlines to focus on optimizing business class rather than first class.
• 💼 Airlines segment their market based on passengers' willingness to pay, offering different ticket types for tourists and business travelers.
• 🛫 In the early days of commercial aviation, all flights were considered premium due to the high cost of flying.
• 💼 The first air travel classifications emerged in the 1940s and 1950s, with airlines offering different experiences at different price points.
• 📈 Airlines have mastered the art of selling the same flight at different prices to different types of passengers, based on their travel needs and flexibility.
• ✈️ The introduction of the Boeing 747 and deregulation in the US allowed airlines to experiment with luxury and control their ticket pricing.
• 🌍 The perceived competition from the Concorde led airlines to focus on enhancing the business class experience to attract middle-tier travelers.
• 📉 First class cabins are becoming less common as airlines find it more profitable to offer more business class seats due to higher revenue per square foot.

Q & A

What is the main source of revenue for traditional airlines according to the video?

The main source of revenue for traditional airlines is from premium cabins, including premium economy, business, and first class.

How does the video illustrate the revenue disparity between economy and premium class passengers on a British Airways 777 flight?

The video uses an example of a British Airways 777 flight from London Heathrow to Washington Dulles, showing that the premium economy, business, and first class cabins make significantly more revenue than the economy class section despite having fewer passengers.

What is the significance of the Concorde's failure in the context of airline class development?

The Concorde's failure had a profound effect on how airlines structured their classes, leading them to focus on optimizing business class rather than investing heavily in first class, as they initially thought the Concorde would dominate the luxury market.

How did the deregulation of airlines in the US impact the pricing of different classes?

Deregulation allowed airlines to have full control over their ticket prices, enabling them to charge different prices for different classes and experiment with luxury offerings like first class.

What was the initial classification system for air travel in the 1940s and 1950s?

The initial classification system was based on the type of flight, with first class fares offering non-stop flights and coach fares offering flights with multiple stops and odd hours.

Why did airlines start to differentiate between tourist-class and full-fare tickets in the 1950s?

Airlines differentiated between tourist-class and full-fare tickets to segment the market based on what people were willing to pay, with tourist-class tickets being cheaper but less flexible, and full-fare tickets being more expensive but offering flexibility.

What role did the introduction of the 747 and the Concorde play in the development of airline classes?

The 747 provided airlines with the space to experiment with luxury, while the Concorde gave them a reason to, as it was perceived as the first class plane for the rich and famous, influencing airlines to focus on business and economy classes.

Why are some airlines removing first class cabins from their planes?

Airlines are removing first class cabins because the cost to run a first class cabin is significantly more than business class, and the experience is largely the same, making it hard to justify the higher price to passengers.

How does the video explain the economic principle behind airline class segmentation?

The video explains that airlines have figured out a way to sell the same product (a flight from point A to point B) for different prices to different people based on the experience within the plane, demonstrating the economic principle of price discrimination.

What is the current trend in airline class offerings as mentioned in the video?

The current trend, as mentioned in the video, is that first class is being phased out by some airlines in favor of more business class seats, as business class offers a better revenue per square foot and there is not enough premium demand to fill entire planes with business class passengers.

Outlines

00:00

💼 The Evolution of Airline Classes and Revenue Models

This paragraph discusses the financial dynamics of airlines, emphasizing that premium cabins are the main revenue generators rather than economy class. It uses a British Airways 777 flight as an example to illustrate how premium economy, business, and first-class tickets contribute significantly more to the airline's revenue than economy class tickets. The video also touches on the historical context, explaining how commercial aviation initially lacked class distinctions because flying was a luxury in itself. The narrative then transitions to how airlines have adapted their pricing strategies to cater to different market segments, creating a tiered system that maximizes revenue from a minority of passengers.

05:04

✈️ The Impact of the Concorde and Airline Deregulation on Air Travel Classes

The second paragraph delves into the historical development of airline classes, particularly focusing on the influence of the Concorde and the deregulation of airlines in the US. It explains how the introduction of the 747 and the Concorde, along with deregulation, allowed airlines to experiment with luxury and differentiate their services. The Concorde's failure led airlines to focus on enhancing business class rather than first class. The paragraph also discusses the economic rationale behind offering the same flight at different prices based on flexibility and the type of traveler, such as tourists versus business travelers. It concludes with the current trend of airlines phasing out first class in favor of more business class seats due to the lower cost and higher demand for the latter.

10:06

🌐 Sponsorship and Viewer Engagement

The final paragraph shifts focus from the main content to the sponsorship and viewer engagement aspects of the video. It highlights the role of Squarespace in making the video possible and provides a brief tutorial on how easy it is to create a website with their platform, using WendoverProductions.com as an example. The paragraph also includes a call to action for viewers to support the channel through Patreon, follow on social media, and subscribe for future videos, emphasizing the interactive relationship between the content creator and the audience.

Keywords

💡Concorde

The Concorde was a supersonic passenger airliner that represented a significant technological achievement but ultimately failed to be commercially viable. In the video, it serves as a historical reference point for discussing the evolution of airline classes and the impact of technological advancements on commercial aviation. The Concorde's failure is contrasted with its profound effect on how we fly today, highlighting the complex relationship between innovation and market success.

💡Premium Cabins

Premium cabins refer to the first-class, business-class, and premium-economy sections of an airplane, which are typically more expensive and offer enhanced services compared to economy class. The video emphasizes that airlines derive a significant portion of their revenue from these premium cabins, illustrating the economic model of the airline industry where a minority of passengers in premium cabins contribute disproportionately to the airline's income.

💡Economy Class

Economy class is the most basic and affordable class of air travel, characterized by limited amenities and a higher passenger capacity. The video uses the example of a British Airways 777 to show that while economy class seats are numerous, the revenue generated per passenger is lower compared to premium cabins, underscoring the economic strategy of airlines to offer a tiered product to cater to different market segments.

💡Revenue

Revenue in the context of the video refers to the income generated by airlines through the sale of tickets across different classes. It is a key financial metric that the video uses to highlight the business model of airlines, emphasizing that a smaller number of passengers in premium cabins can generate a majority of the airline's income, which is a critical aspect of their profitability.

💡Commercial Viability

Commercial viability refers to the ability of a product or service to be successful in the market and generate a profit. The video discusses the Concorde's lack of commercial viability despite its technological prowess, using it as a case study to explore the factors that contribute to the success or failure of innovations in the airline industry.

💡Airline Classes

Airline classes denote the different service and comfort levels offered by airlines, including economy, premium economy, business, and first class. The video traces the historical development of these classes, showing how they evolved from a single class to a tiered system that allows airlines to maximize revenue by segmenting the market based on passenger willingness to pay.

💡Deregulation

Deregulation in the context of the video refers to the removal of government controls and regulations in the airline industry, particularly in the US. This policy change in the 1970s allowed airlines to set their own ticket prices and experiment with different classes, leading to the diversification of airline offerings and the introduction of more premium services.

💡First Class

First class is the highest level of service provided on commercial flights, offering the most luxurious amenities and comfort. The video discusses the historical context of first class, noting that its presence on airlines was influenced by the Concorde's positioning as a supersonic first-class experience. It also touches on the current trend of some airlines removing first class to maximize revenue through business class seats.

💡Business Class

Business class is a premium travel class that offers more comfort and services than economy class but is typically less expensive than first class. The video highlights the strategic importance of business class for airlines, as it appeals to business travelers who value comfort and flexibility, and it generates significant revenue for airlines.

💡Squarespace

Squarespace is a website building platform that is mentioned as a sponsor of the video. It is used as an example of how easy it is to create a professional website, even for those without extensive web design skills. The video creator uses Squarespace to create a simple landing page for Wendover Productions, demonstrating its utility for quick and effective web presence establishment.

Highlights

Concorde's failure had a profound effect on how we fly today.

Airlines make more money from premium cabins than economy class.

On a British Airways 777, premium economy, business, and first class make up 84% of the airline's revenue.

Higher fares for non-stop flights between high-income, high-demand cities.

In the early days of commercial aviation, all flights were premium due to high costs.

Airlines have segmented the market based on what people are willing to pay for different travel experiences.

The first air travel classification happened in the 1940s and 1950s with the introduction of coach and first class.

Airlines started selling the same flights for different prices based on ticket flexibility in 1952.

The introduction of the 747, the Concorde, and airline deregulation in the US led to more luxury options in the 1970s.

Airlines initially avoided first class to differentiate from the Concorde, focusing on business class instead.

After the Concorde's failure, some airlines reintroduced first class on subsonic planes.

First class is becoming less common as airlines find it more profitable to add more business class seats.

Economy class passengers are essential for filling planes, but generate less revenue per square foot compared to premium classes.

Squarespace sponsorship allows for easy website creation, as demonstrated by WendoverProductions.com.

Use the code 'Wendover' at Squarespace.com/Wendover for a 10% discount and support Wendover Productions.

Transcripts

This is a Wendover Productions Video made possible by Squarespace--Make your next move

with a beautiful website from Squarespace. This video is a bit of a continuation to my

last one--Why Planes Don’t Fly Faster. I ended up talking a lot about the Concorde--the

supersonic plane--but part of the story was left untold. Even though the Concorde failed,

even though it wasn’t commercially viable, it still had a profound effect on how we fly

today. Let me explain... Economy class is not how airlines make money.

The real money, at least for the traditional airlines, is in premium cabins. Let’s take,

for example, this British Airways 777. There are 224 total seats on this plane and it flies

daily between London Heathrow and Washington Dulles airport. A roundtrip economy class

ticket leaving March 15th and returning on March 22nd costs, at the time of writing,

$876. That means that, if each one of the 122 economy class seats is filled, the entire

back section of the plane will make the airline, round-trip, $106,872. Meanwhile, the going

rate for one of their premium-economy seats is $2,633 round-trip meaning the entire cabin

will make $105,320. Already you can see that the entire 40 seat premium-economy section

makes British Airways roughly as much as the entire economy-class section. Going up to

Business Class, there are 48 seats sold each for $6,723 making the airline $322,704. The

14 first class seats are sold for $8,715 each or $122,010 total. So, once again, the 14

passengers at the front of the plane make the airline more money than the 122 at the

back of the plane. In total, the three premium cabins--premium economy, business, and first--make

the airline on this flight $550,034. That means that 45% of the passengers account for

84% of the airline’s revenue! Now, I need to add some caveats. There is

no airline on earth that makes half a million dollars for a six hour flight over the Atlantic.

If they did, they would be swimming in money. The fares for this particular routing are

significantly higher than the average fare paid for that flight because they’re non-stop

fares between two high-income, high-demand cities. Of course, a majority of the passengers

on that flight will not be traveling between London and Washington, they’ll have connected.

If you originate the ticket in, say, Stockholm, and connect onto that 777 flight to Washington

the economy class price drops to $392, the premium economy to $1,150, the business class

to $3,025, and the first class to $5,564. But the proportions are still roughly the

same. A vast majority of the revenue comes from a minority of passengers. This particular

British Airways 777 is also a very premium-heavy configuration because British Airways is an

airline that focuses a lot on premium travel, but still, on average, 2/3 of any airlines

revenue comes from passengers in First, Business, or Premium Economy class but this wasn’t

always the case. In the beginning of commercial aviation, there

weren’t really any classes because everything was premium. That’s not to say that planes

were very luxurious--a 1920s plane looked like this--but flying was just so expensive

that the experience of flying was the luxury itself. It’s kind of like how you don’t

see Virgin Galactic selling first, business, and economy class seats on their planned tourist

flights to space. The experience itself is the luxury. Once commercial space travel becomes

commonplace, we’ll almost certainly see a classification of the experience but until

a transport method is at a cost where it’s attainable to the normal person, it’s all

first class. In 1950 a round-trip coach fare between New

York and London was $675--adjusted for inflation, thats $6,800 today--roughly the same price

as a first-class ticket on the same route nowadays. It’s the exact same type of passenger

flying in both these seats. What’s changed is who’s flying further back in the plane.

So the story of the development of airline classes really isn’t the story of how airlines

developed more and more luxurious seats, it’s how they cut costs to allow more and more

people to fly. It’s also a fascinating demonstration of economics. Airlines have figured out a

way to sell the same product for different prices to different people. The overall product

that airlines are selling is the same no matter which class you’re flying--a flight from

point a to point b. What’s different is the experience within the plane.

The first classification of air travel happened in the 40s and 50s. A significant amount of

revenue for airlines at the time came from contracts for air-mail routes with the US

Postal Service. These flights flew with many stops often overnight or at odd hours. While

the planes mostly carried mail, they still had a passenger section. The first class fares

got you, for example, on a non-stop flight between New York and Chicago while the coach

fare might get you on a mail flight that left at 2am and stopped in Pittsburgh and Cleveland

on the way to Chicago. While the fare was cheaper and the flight took longer, the experience

onboard the plane was largely the same. It wasn’t until 1952 that airlines started

selling the same flights for different prices. One airline, for example, sold standard class

one-way tickets between New York and London for $395 and tourist-class tickets for $270.

It was the exact same flight on the exact same plane--the difference was in the ticket.

Tourist class tickets had to be purchased in advance and had no flexibility--you had

to fly on the exact flight the ticket was purchased for. As the name suggested, these

tickets were primarily for tourists. Tourists plan trips far in advance and don’t really

need flexibility so it was no problem for them to commit to one flight. The full-fare

tickets were for the other type of traveller--the business-person. Business travelers, first

off, don’t typically pay for their own tickets. They’re paid for by their employer so they

individually don’t really care what the ticket costs. Business travelers also require

flexibility and generally don’t purchase tickets until the last minute. At the time,

it was common practice to just walk up to the counter an hour before a flight and buy

a ticket. That’s what the full-fare tickets were for. Through this system, the airlines

segmented the market into two categories based on what people were willing to pay. Over the

coming decades, this was the only large classification system in air travel.

Then, between 1969 and 1978 three things happened--the 747 flew for the first time, the Concorde

flew for the first time and airlines were deregulated in the US. The 747 gave airlines

the space to experiment with luxury, the Concorde gave them the reason to, and deregulation

gave them the ability to. Previously, all airfares were heavily regulated in the US

and it was difficult for airlines to charge the cost they wanted for different classes

but with deregulation airlines now had full control over their ticket prices. Now, at

the time, much of the difference was still in the ticket. Some airlines had introduced

first class fares with nicer seats, but airlines realized that they had to start treating the

business-people who bought a full-fare coach ticket differently than the tourists paying

a discounted fare. More and more of those business travelers were just paying the tourist

class fare. It began by just physically separating the passengers. The full-fare passengers would

be seated up front while the discounted fare passengers would be put in the back. Then,

some airlines started blocking out the middle seat next to the full-fare passengers. Finally,

some airlines started to build cabins with slightly nicer seats and better amenities.

But, with exceptions, airlines avoided first class. Most focused on capturing that middle

tier of traveller because the Concorde was going to be the first class plane for the

rich and famous--regular planes would be the business and economy class... at least that’s

what they thought. Of course, as you heard about in my last video,

the Concorde failed... spectacularly. Airlines avoided first class in the 70s and 80s because

of the Concorde, but as they started to catch on to the failure of supersonic flight, select

airlines slowly reintroduced first class to subsonic planes. But the effect is still seen

today. Of the dozens of airlines flying transatlantic, only six have a first class cabin. Back in

the 60s and 70s the imminent perceived competition of the Concorde really invigorated airlines

to optimize that middle class--business class--and we likely would not have seen it as early

as we did without that looming disruption to the industry.

But there’s another trend to explain--first class is going away... again. Let’s take

a look at the seat-map of a Etihad a380. Each economy class seat on this plane takes up

3.77 square feet (0.35 m²) of floorspace, the business class seats take up 10.14 ft²

(0.94 m²) of floorspace, and the first class seats take up 35 ft² of floorspace (3.25

m².) On a flight from Abu Dhabi to New York, economy class tickets are $1,253 round-trip,

business class tickets are $6,140, and first class tickets are $14,128. That means that

economy class seats make $332 per square foot, business class seats $605 per square foot,

and first class seats $403 per square foot. The difference between economy class and business

class is huge--it’s a cramped seat versus a bed--but the difference between business

class and first class is just a bit more room and some better food. It’s very hard for

airlines to sell first class for much more than business class since the experience is

largely the same but the cost for the airlines to run a first class cabin is significantly

more. Therefore, more and more airlines are taking out their first class to just put in

more business class, it just makes more money. If an airline could fill an plane full of

business-class passengers it would--its been tried--but pretty much no route has the premium

demand to fill a plane-full of business class. Everyone in economy, in the end, is just there

to fill the plane. This video was made possible by Squarespace.

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