Why the Airlines Created Premium Economy to Solve a Pricing Problem

By Brett Snyder

Brett Snyder is the author of the award-winning airline industry blog, “The Cranky Flier," and president and chief airline dork of Cranky Concierge air travel assistance, for which he has been named one of the Top Travel Specialists for the past three years by Conde Nast Traveler.  He is a contributing editor for PlaneBusiness and he writes for both CNTraveler.com and the Intuit Small Business Blog.  Snyder previously worked in pricing, marketing and strategy roles with several airlines, including America West and United.  In 2005, Snyder created the travel search site for leading comparison shopping company PriceGrabber.com.  Snyder graduated from The George Washington University with a bachelor’s in business in 1999 and Master of Business Administration from Stanford University in 2004.

Part of having an effective pricing strategy is ensuring that you have the right products in the market to cater to interested consumers.  This might sound like a startup issue, but it's not.  Product and pricing are constantly evolving, so ongoing reviews are very important.

One needs to look no further than the airline industry to see an example of how the product offerings have evolved.

Initially there was only one class of service, and it was expensive.  Travelers were treated well (or as well as possible flying small, slow airplanes for hours and hours on end), and they paid for it.  But eventually the airlines began to realize that there was real opportunity at a lower price point.  Coach travel was born.

Initially, the difference between coach and what became First Class wasn't all that different.  And the pricing reflected that.  But as countries moved toward deregulating their airline industries, pricing diverged dramatically.

In the US, coach prices plunged as airlines raced to add capacity and serve this growing demand.  First Class prices, however, stayed high.  They were meant to cater to the original air traveler who wanted a superior experience.

In the intercontinental market, the price differential became so great that eventually a middle tier was introduced.  That was Business Class.  Business Class was created as a way for travelers to get something better than coach without having to pay the many multiples above the coach price to sit in First Class.

That lasted for some time until the same trends from before took hold in the new three-cabin environment.  Many airlines decided to remove First Class or shrink the First Class section while improving their Business Class product, hoping to take traffic from those who flew First Class on competitors.  When British Airways and Virgin Atlantic introduced flat beds in Business Class more than a decade ago, it was the first shot fired in a race that would make flat beds the standard.

First Class became something for the super rich with small, intimate cabins on fewer and fewer flights.  Business Class continued to be a premium product but one that was at a price point that could appeal to more people.  At the same time, coach prices continued to plunge in inflation-adjusted dollars.

The result was yet again a massive divergence between coach prices and the next class up.  How could this conflict be resolved?  The airlines began introducing another class.  This has manifested itself differently in the US than it has elsewhere.

In the US, airlines have simply increased legroom in a few rows at the front of coach and they sell those for a few dollars over the coach fare.  But around the world, airlines like ANA, Japan Air Lines, Air France, British Airways, and, just recently, Lufthansa have introduced a truly new premium economy class.  

[Lufthansa link: http://www.lufthansagroup.com/en/press/news-releases/singleview/archive/2014/march/05/article/2828.html].

Now if a flight from the US to Europe is running about $1,000 in coach, $6,000 in Business, and $9,000 in First, there is now a premium economy option in the $2,500 range.

Having products that fill in the gap like this become important because they provide a real upsell opportunity for the price-conscious consumer who also values a premium offering.  For the airlines, Business Class had become too much of an upsell to tempt the average coach traveler.  But premium economy provides the right product at the right price.