All-Business Class Airlines Tend To Fail Because They Can’t Compete

It seems like such a good idea — configure an airplane with large, extra-comfy seats only and cater it with great food and wine. Then schedule to fly between two big cities, like London and New York, and clearly there’s enough business demand to make this idea work. In fact, the idea seems so good that it has been funded many times and is still being tried today. You can book a flight today on La Compagnie, the all-business class airline flying between New York and France (both Paris and Nice), for just $2,400 roundtrip. Expedia shows the lowest business class flights between New York and Paris for end the of June priced from $4,000 to $10,000 on the big airlines. La Compagnie must have found their niche.

Not exactly. It’s more likely that La Compagnie is looking at flights with a lot of empty seats and they are running a sale, hoping that their bigger competitors don’t match their price. History shows that most all-business class airlines fail, the investors lose their money, and customers are stranded. Eos tried this from New York to London, as did the UK’s Silverjet. MGM Grand tried to exploit a loophole in the Wright Amendment, then in place at Dallas’ Love Field airport, to fly all-business class jets from Dallas to Chicago and Los Angeles. All-business class airlines often fail for many reasons:

High-Priced Demand Isn’t Always There

For an airline, planes, people, and real estate are paid for every day of the year. High-priced demand doesn’t fly all the time, and having to sell expensive seats for rock bottom prices to fill the plane isn’t a winning strategy. Picking routes to fly with good business demand often means not being able to reallocate the plane at times of the day, week, or year to other opportunities.

The best business airline in the U.S.is likely Delta Airlines, since they do the best at attracting the most high-paying customers. Yet Delta also has a lot of economy seats too, because they recognize that business travel isn’t there on every flight, 24 hours a day. They also recognize another business reality. Price premium can come from a nicer product for sure. But price premium can come from scarcity, also. Why doesn’t Harley Davidson make more motorcycles, or for that matter why do Boeing and Airbus have multi-year backlogs of orders? When every seat is really nice, people will pay less than if only some of seats are really nice.

Product Isn’t Only Onboard The Airplane

The biggest product any airline can offer its customers is its route network. Being able to get you anywhere you’d like to go is powerful, and often beats out other things. Flying from London to New York is great if that’s where your starting and ending your trip. But is every trip just this? Why would someone vested in United Airline’s frequent flyer program, and who uses United for most of their travel to and from New York, choose a different carrier just when going to London?

Product is also things like a corporate deal that allows employees from multiple cities to save on a trip. It’s a loyalty program that can offer upgrades and free flights, and can tie into non-airline spend by use of a credit card. It’s a specialized call number that can take care of me because I fly a lot, and give me faster access to recovery when things go wrong. Product is all those things, in addition to a nice seat, good food, and a friendly crew.

All-business class airlines conflate great airport and onboard experience with great product. It’s only part of the product, and the things they miss matter a lot to regular travelers.

Big Networks Have Major Competitive Advantages

Larger networks have a major advantage versus smaller, nonstop competitors. The beginning of the modern alliance started in the early 1990s when Northwest Airlines and KLM Airlines, each the then-fourth largest airlines in the U.S. and Europe respectively, created a joint venture. Connecting these two networks worked well and was the forerunner for today’s Skyteam Alliance. At one point, the carriers offered five trips per day, on large airplanes, between Detroit and Amsterdam. This was possible because each ran a large hub at these stations, making all kinds of connections around the world available for the first time on a single alliance.

Compare this to what has been offered by all-business class airlines, admittedly choosing the largest single routes to serve. With so many ways to feed customers into the route one way, and distribute them at the other end, it means the large carriers and their partners can diversify their passenger base in ways the nonstop airline cannot. Ask any former employee of Eos, Silverjet, or Maxjet, and they will tell you these were the things, along with the frequent flier programs and corporate contracts, that made it impossible to compete even with a great onboard product.

Competitive Focus

The airlines that do well against against the large network airlines are low-cost operators. They can offer fares not really economic for the big guys, and attract a highly price-sensitive customer. In doing so, they present a small threat to the large airlines, who are focused on attracting higher-paying passengers.

When the New York-London all-business airlines started, this presented a signifiant threat to the big airlines serving this route. That’s because anyone paying for a nicer service was their target customer, so through all means they made it tough to compete. It didn’t matter than they maybe served only one or two routes and had only a few planes. Everyone they carried was seen as a stolen customer. While focusing on these carriers intently, they still often ignored or were more passive against much larger airlines, including initially Southwest, and later airlines like Spirit.

No Scale Economies

Being low-cost isn’t really possible for an all-business class airline. Their use of onboard real estate is, by design, inefficient to give everyone space. Offering high quality food and drink, and good airport spaces are also expensive. But the real cost issue comes from the fact that, with just a few planes, the all-business class airlines have no scale economies. This means they pay for almost everything at rack rate. By comparison, their much larger competitors may be even more inefficient in their operations but by having scale, they pay less most things.

Add to this that the all-business class airlines are trying to attract a high-price paying customer. This means dealing with expensive distribution, needing a sales force, and having a resulting high cost of sale for each customer. Add cost inefficiency to lack of network strength and no meaningful loyalty program, and it is easy to see why most of these ventures fail.

Leisure Customers Subsidize Business Travelers

This helps explain why for large airlines, it really is the low-price, leisure customers that subsidize the high-price business customers. This is because if airlines like Delta, American, and United carried only business travelers, their networks would be significantly smaller. The high frequency and network depth so useful for business customers is only possible because airlines can use price to fill the empty seats with pliable leisure passengers.

This is not to say that every all-business class airline will fail. While I will be surprised if La Compagnie is here in five years, they may be thriving. There also are likely certain geographies that could work well with this approach, or with small enough planes and lower costs an airline like JSX has created an interesting model.