BREAKINGVIEWS-First-class airline bet is economically well-timed

By Oliver Taslic

LONDON, April 2 (Reuters Breakingviews) - United Airlines UAL.O is giving new meaning to sitting at the “front” of the plane. The $31 billion U.S. carrier held a splashy event in late March to showcase its planned premium services – one of which has so many upmarket seats they stretch all the way to the back of the wing. It’s part of a wider global battle to lure wealthy fliers by offering fancy pyjamas, vintage champagne or extra space. The move seems to jar with austere warnings of potential jet fuel shortages from the likes of Finnair. But recent history suggests that racing upmarket in troubled times makes sense.

The post-pandemic “premiumisation” trend has been a blessing for groups like United, $44 billion Delta Air Lines DAL.N and $22 billion British Airways owner IAG ICAG.L. Business travel was whacked by Covid-19, and videoconferencing means much of it may never return, with IAG’s finance chief dismissing comparisons with 2019 as “ancient history”. Fortunately, wealthy holidaymakers wanting to travel in style have more than offset the shortfall, with Air France-KLM AIRF.PA CEO Ben Smith last year pointing to “unbelievable” spending from Americans vacationing in Paris. Catering to the better-off has been a winning strategy, with shares in more premium-oriented Delta and United outpacing rival American Airlines AAL.O in recent years.

True, focusing on swanky lie-flat seats might seem odd given the global industry’s current backdrop. Jet fuel prices averaged $195 a barrel in the week ending March 27, according to IATA, almost double the level a month earlier. United has made plans that assume oil rises as high as $175 a barrel, while airlines in more Gulf-dependent regions like Europe and Asia are worrying about shortages. Vietnam Airlines said it would suspend several routes for lack of fuel. Oil prices rose around 7% on Thursday, as President Donald Trump said the U.S. would keep up attacks on Iran without committing to a specific timeline to end the war.

Nonetheless, recent history shows premium resilience even in times of economic stress. In the third quarter of 2022, amid higher oil prices following Russia’s invasion of Ukraine, Delta reported main cabin revenue 2% below the same period in 2019. Premium sales were 8% higher. When regular U.S. consumers braced for turbulence after last April’s “Liberation Day” tariffs, IAG reported a disappointing summer for transatlantic economy travel. More upmarket seats, however, held up well.

There are still risks. In a March note, JPMorgan analysts pointed out that, around the time of the invasion of Iraq in early 2003, British Airways’ premium traffic underperformed the economy cabin. It’s also possible that sustained high oil prices could hit equity markets hard, leading to a negative “wealth effect” that dents animal spirits and therefore travel among the world’s richest fliers. Still, markets are not quite there yet. And higher fuel costs necessarily call for higher fares. Leaning on those better able to afford it simply makes financial sense.

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CONTEXT NEWS

United Airlines said on March 24 that it expected to take delivery of more than 250 new aircraft by April 2028.

The U.S. carrier said it planned to launch new, more premium services on regional and transcontinental routes, adding that its long-haul Boeing 787 with an “Elevated interior” would fly internationally starting on April 22. The jet features 99 premium seats out of a total 222, or around 45% of the aircraft.