Expect Some U.S. Airlines To Announce Seat Configuration Changes In The Next Year

How many seats to put on an airplane, and how many different classes of service, is a critical decision that every airline must make. Years ago when I first joined Spirit Airlines, we had A320s with 168 seats. When meeting with an Asian low-cost airline CEO, he looked quizzically and said “if the regulators let you put 180 seats on the plane, why on earth would you put fewer?” This clarity is easy if your goal is all about low fares. For most airlines, the answer is more complicated.

Changing how seats are configured is an expensive decision that takes time, and is a hard decision to reverse quickly. The pandemic first became reality in March 2020. For a year or more, the industry had no idea what would happen with demand as a result of this. As we got into the fall of 2021 and all of 2022, some things were starting to clarify: leisure demand was strong and people didn’t like being stuck at home. Business demand was trending back to 2019 levels but the curve started to flatten at about 75%. Today, most in the industry accept that there has been a structural shift in business traffic, and new types of higher-fare paying leisure demand have been identified. Now, airlines can start thinking about what these new demand patterns mean for aircraft seating.

Airline Operating Reactions To The Pandemic

Prior to re-thinking seating, U.S.airlines have already started to re-design parts of their business. Airplanes move, so it was easy for airlines to add capacity to leisure destinations or to less restrictive states. It was also easy to reduce frequency, if necessary on some routes when the total demand no longer justified the prior levels. These kind of decisions are easy for airlines to make, and as quickly as they are implemented they can be re-done again. That’s why they were the fastest reactions.

In the last year, airlines have started to make changes to their loyalty programs. This makes sense, as what loyalty means is changing as people choose to fly less or their company pays for fewer trips. Credit card spend, long a source of profit for airline programs, is now mostly considered on par with actually flying the airline when it comes to loyalty credit. Some airlines have re-priced what certain rewards cost, recognizing that rate of points accumulation has also changed.

Loyalty programs take longer to change than flight schedules, but the cost of changing doesn’t stop the planes from flying or require any new physical capital expense. That’s why these changes happened two or three years into the pandemic, when post-pandemic demand is starting to clarify but still isn’t completely clear. Making changes to seating configurations is the most risky, because of the costs to do it and the risks of making the wrong decisions.

Economics Of Fewer Business Travelers

Corporate business travelers have traditionally paid three to five times, or sometimes more, of the average rate of the lowest fares sold. This is for two key reasons. One is that they tend to book much closer to the departure date. Since seats “spoil”when the plane takes off, meaning that it can no longer be sold, fares tend to rise as the departure date approaches. The second reason for higher corporate fares is because in the selection of the flights, issues of flight time, loyalty points, nonstop versus connection, and other non-price issues tend to be more important in the selection process.

Losing any of this traffic is penalizing to the three largest U.S. airlines, who have designed every part of their business to attract this kind of passenger. United has stated that business travel levels have plateaued. Delta and American have each said similar. With business travel volumes down about 20% versus 2019, this is signifiant. But it may be even worse than this. That’s because, historically, U.S.business travel has closely correlated with U.S. GDP. The U.S.GDP has grown since 2019, suggesting that business travel should be even bigger than 2019. So, comparing to 2019 is a low bar. Delta Airlines recently announced that their business travel revenue is at 2019 levels, since fares are higher and have made up the volume difference. But while this is strong, it is not enough to make up where business travel should be.

With industry load factors at about 85%, there aren’t enough seats to make up for the loss of business travelers. That’s why airlines have been focusing more on other passengers who may not pay as much as corporates, but certainly pay more than the most price discretionary passengers.

Blended Travel And Premium Leisure

These two traveler types have emerged as new categories, especially for the largest four airlines. Neither are new, but by focusing more them airlines may be able to grow their ranks. Blended travel, sometimes irritatingly referred to as Bleisure, is based on people doing business while on a leisure trip. This could be as simple as reading and responding to email, or attending a Zoom meeting, or preparing work for a later meeting requirement. By focusing on making this happen more, airlines could stimulate more of this behavior. This traveler would not necessarily pay more than a truly discretionary trip, but they may extend their trip because they can get work done while not in an office.

Premium leisure, also not a new category, has more promise for business traveler replacements since these travelers are willing to pay for a better overall experience. For the airline, this could mean paying for a premium economy seat or even business class. It could also mean being more choosy on flight time, such as a nonstop versus connection, again with this choice coming with a price premium. This traveler is touchy, though, because for the right price they likely will pay up. But, charge too much and the airline will miss the business altogether.

Implications For Long-Distance Travel

Long-distance travel has been most dependent on corporate business travel to make the current seat configurations work. With fewer corporate travelers, airlines will likely look to downsize business class cabins but offer more premium economy options. It also means that airlines may be more interested in improving the premium economy experience. This could mean keeping the current density but better sleeping options. One company is even designing a double-decker seat for this idea.

This kind of move could also add more regular economy seats to long-haul aircraft. With fewer corporate travelers, airlines need more volume to make up the revenue loss even if currently some of this travel is paying more today. Sustained revenue premiums are something that have been hard for the industry to maintain for long periods of time.

Making The Right Bets

These kind of moves are hard to make, because changing seating may require new capital for the new seats, downtime while the plane is being updated, and of course the labor to do the work. For the largest U.S.airlines, this could take a long time if they make new seating decisions for much of their fleet. On the big planes, elimination of any remaining first class and downsizing of business class seems inevitable. This ultimately would result in more seats per aircraft. While being better fit to the post-pandemic demand reality, this also becomes a way to mitigate some other increases in expenses by creating more ASMs with each trip. This would help lower their unit costs.

For narrow-body equipment, the changes would be less dramatic but still likely mean fewer up-front seats and more in the premium economy or regular economy sections. The question each airline should consider is how much change is the new environment worth? For airlines that carry little to no business travel, likely no seat changes are needed. For the the big airlines, at this point not changing is probably a bigger risk that making some changes toward less premium and higher overall density. With networks adjusted and loyalty programs already changing, this is next big post-pandemic adjustment we’ll see for the airlines. Expect some moves in the next 12 months.