American Airlines says goodbye to long-haul first class as premium leisure, and blended trip, travelers pay up for business class.
American Airlines is making a big bet that the pandemic shift to more premium leisure travel, or at least premium blended travel, is here to stay. The carrier will expand the number of premium seats on its intercontinental planes by up to 60 percent over the next four years, in a move executives think will make the routes those aircraft fly even bigger money makers.
That shift is a function of many things, American Chief Commercial Officer Vasu Raja said in a long-winded answer during the airline’s third-quarter results call Thursday. Part of it is the broader trend towards blended leisure and business trips that Raja said at the Skift Global Forum in September now make up nearly half of the carrier’s revenues. “All of that is coming at a higher net yield values than what was there before,” Raja said of blended and leisure premium travel today.
Another is American’s pivot to more short-haul and less long-haul flying, and relying more on its international partners to provide the “largest global network in the world.” That shift means more of the airline’s remaining long-haul capacity is concentrated on flights to these lucrative hubs — London Heathrow, São Paulo Guarulhos, and Tokyo, for example. Places that, “frankly, through the strength of our partnerships, we’re able to go and make a larger premium cabin work,” Raja said.
And, quite simply, expanded business class cabins are what American’s “customers most want or most willing to pay for,” Raja said. Travelers on blended trips now make up 40-50 percent of all premium revenue at the airline, he added.
Skift identified the rise of premium leisure travel as a 2022 travel megatrend.
American’s onboard investment will come at the expense of long-haul first class, a dying product that carriers like Delta Air Lines and United Airlines have already eliminated. American will remove lie-flat first class seats from its Boeing 777-300ERs beginning in 2024. This is an entirely different product from the recliner-seat first class seats it offers on narrowbody planes, like the Airbus A320 or Boeing 737, that will remain.
The carrier’s 777s, as well as its Boeing 787-9s, will receive a new business class and premium economy products as part of the upgrades. The new layouts on these aircraft will represent a 30 percent increase in premium seats on the former, and a 63 percent increase on the latter. American has also unveiled cabin layouts for its new Airbus A321XLRs, a new long-haul narrowbody plane could begin arriving in 2024, with 32 premium seats.
Demand For The Taking
“We continue to believe that 2023 demand for air travel will be robust. We currently see no signs of demand slowing as we move into the new year,” American Chief Financial Officer Derek Kerr said Thursday. His view that echos those of executives at competitors Delta and United, which also see robust travel demand continuing unabated.
Delta CEO Ed Bastian went as far as to call travel “countercyclical” to the current macroeconomic uncertainty. Both the U.S. and Europe are expected to fall into recessions either later this year, or early in 2023. This comes amid high inflation, elevated energy prices, and a strong U.S. dollar that hurts other economies.
Much of the upside is in the continued recovery of long-haul international flying, and managed corporate travel. Both segments remain down compared to 2019, while the leisure and small- and medium-sized corporate travel segments have fully recovered — and drove American’s strong revenue performance this summer — airline executives said.
In the third quarter, revenues at American were up 13 percent compared to three years ago to $13.5 billion. That performance is even more notable considering the carrier flew nearly 10 percent less capacity and passenger traffic.
With the demand outlook strong, American plans to fly roughly 95-100 percent of its 2019 capacity next year, Kerr said. That is several points lower than the airline would fly if it did not face delays taking new aircraft — Boeing will deliver at least eight fewer 737-8s than are scheduled, or 19 total — and the continuing U.S. pilot shortage that is affecting regional airlines.
American CEO Robert Isom said the situation at the carrier’s regional affiliates was not so much hiring new pilots, but upgrading first officers to captain. Upgrading pilots to captain can take several years and includes additional training requirements. Easing the regional staffing issues, even with the pay raises pilots at American’s subsidiaries received in June, and fully restoring schedules will take “maybe two to three years to work out,” he said.
And the Numbers
American reported a $483 million net profit in the third quarter on strong revenue growth. Total unit revenues — a rough proxy for airfares — increased 25 percent compared to 2019, and unit costs excluding fuel increased 14 percent. Its operating margin was 6.9 percent.
Fuel expenses, which shot up earlier this year after Russia’s invasion of Ukraine, averaged $3.73 per gallon in the September quarter. That was a welcome more than 7 percent decline from the prior quarter, but still an 82 percent increase from three years ago.
Looking ahead, American forecasts an 11-13 percent increase in revenues compared to 2019 during the fourth quarter. Total unit revenues will be up 18-20 percent, and unit costs excluding fuel 8-10 percent. The airline plans to fly 5-7 percent less capacity in the period than it did three years ago.
Photo credit: American is making a multi-million dollar investment in new business class seats on its intercontinental aircraft. American Airlines