Thursday, November 20, 2008

United on premium customers - not sure what will happen to demand in 2009 but am sure that premium customers do not make decisions based on price

United I posted on Monday some thoughts about the premium air fare product and the downturn/crash/eco tsunami. On Center Stage at PhoCusWright is Tim Simonds the MD of Customer Strategy and metrics for United Airlines talking about the increased focus that United will be making on the premium customer. Simonds highlighted that in the US Air market the premium passenger sector represented 30% of revenue in 2007 but lept to 50% in 2007. He was open and honest that he did not know if the numbers would hold up in 2009 but premium will still be a core focus as "a very attractive part of the market".

It will hold up in his view because United is rolling out new product. He displayed this product to us - which looked like an Emirates, Singapore Airlines or Cathay Pacific advertisement from 2004 - so is only a revolution if you are looking solely and US based carriers. When asked on this point Simonds admitted that the product will not be as "good as foreign flag carriers. The first step is to be number one in the N.American market".

In response to this a mini revolution broke out on the Center Stage floor. Questions were asked about what this meant for United's commitment to non-Premium customers. Charlie Leocha of Tripso put it simply "Doesn't this mean that United abandoning the back of the plane?".

Simonds answer "we try to give a high level of service consistent with the level of value that each customer has paid. But agree the bar needs to be raised for everyone." To another version of the question he answered "we need to enhance economy plus but quite simply there is a large and increasing differentiation between economy and business."

In a follow up Simonds said that he thought this strategy was appropriate because (and this is the main point) " United do not see the premium customer as making decisions based on price." I am trilled to hear a US airline rep talk about lifting the level of service and experience but I do not agree that premium customers will not be making price based decisions. I have been a top tier Qantas flyer for now 8 years. Yet this year I flew more long haul economy that any time since 1999. Price is now a greater factor in my decisions that any time in my non-lawyer career. It will be a factor in 2009 for a large majority of premium flyers. US airlines need to register this and improve the "behind the curtain" products.

what do you think?


Philip Caines said...

Hey Tim, you make a good point, backed by the previous presentation where Sophie Forest from BrightSpark stating that everyone is tightening their belts for the next 18 months. We may see more economy warriors than United expects.

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amh15 said...

I think there's a lot of truth in the claim that they don't make decisions based on price.

My experience of business travel has been that people have certain classes and airlines that they are allowed to use. They tend to get whatever luxuries they can within those restrictions, provided that the fare is not an obvious rip-off, e.g. outrageously more expensive than a clearly equivalent or more suitable product. In my last job, for cheap short haul flights, a doubling in price was immaterial if the timing worked better. For long haul Premium Economy / Economy Plus type tickets, I would say 20% price variation was easily within my discretion, provided I was sticking to a similar class of service.

I recently estimated the cost to my old firm of the cost of the lost time spent researching a single business trip, and it came out to about US$200. I think the high cost of inaction or wasted time in business creates a sense that the price of flights doesn't matter that much. Employers create rules to try to prevent this from spiralling.

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Anonymous said...

Fair enough to provide good service for the people up the front but just like the rest of the market premium travel is slowing.

IATA reports that "Premium travel declined by 8% over the 12 months to September, as the fall in business travel gathered pace reflecting the severity of the economic downturn. This decline follows a 1.5% fall in August."

While I haven't seen the figures for October yet I'd guess that they'll be worse.

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Anonymous said...

Late comment - just discovered your excellent blog. US legacy carriers (like US auto makers) have significantly higher legacy costs from union contracts, healthcare and pensions. Things that are paid for by governments in other countries. We can debate whether it was ever sensible for the US to structure social service delivery around corporations rather than governments, but the fact that US airlines' service is stuck in the 1970's has a lot to do with costs as well as price competition. US airlines have lost tens of billions over the last 10 years, and have focused on trying to get out of Chapter 11 rather than customer upgrades.
One other comment closer to the topic relates to corporate travel policies. I have seen a lot of corporate travel policies change to requiring coach travel at the lowest possible fare which is usually non-upgradeable and I think this trend will continue. United has tried to focus on the premium end of the market to differentiate itself from other carriers. It may not look like much from the perspective of other countries, but the separate First Class Lounge and now the flat beds in Business will go some way to demonstrate their commitment to premium customers. However I think it's insane to think premium customers are not price sensitive. The only customers they are likely to win however in this economy are those who are trading in their corporate jets.

Tim Hughes said...

@Anon - I agree that US carriers operate in a more challenging environment than Asian and middle eastern carriers, especially in the area of staff costs. It is true that carriers from these markets enjoy loads of government support and much lower staff costs. This puts the US carriers at a disadvantage to carriers from other markets. But the US carriers have a huge advantage in the size of their domestic markets and the scale that this offers. Where I think they have lost the plot is that in trying to reduce the staffing costs, the carriers have gone to war with their staff by cutting hours, cutting conditions and more. The result of this "war" is that the staff of the airline dont like the management and take it out on the consumers. The number one thing that the US carriers need to do is re-create a customer culture.

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