Airlines are All-In on Premium Seating

Tyler Crowe (0:02)

AER lines are going all premium. Motley Fool Hidden Gems Investing starts now.

Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long-time full contributors, Matt Frankel and Lou Whiteman. So today we're going to test a little bit of what we call our baloney meters, whether or not what is going on in financial news media actually makes sense or not. And then we'll also, of course, hit the mailbag as we always do. But we want us to start today on the premiumification, if that is a word, if not, I just made it up, of airlines. The reason that we're bringing this up today is that one of the lead stories in the Wall Street Journal was on Alaska Airlines basically really upping their game in terms of their first-class cab. And as we started discussing this in our channel to prep this morning, Lou also sent a picture over of a United flight where their new cabin configuration was like more than 50% first-class. And it does seem to be that this is where a lot of the airlines want to go, is this, we are pretty much a first-class flyer, and then maybe we'll toss in four or five economy seats while we're at it.

And this is, at least to me, it seems like a clear change in the way that airlines want to do their business. So guys, what is the business case for doing this? Because first-class means fewer people.

Lou Whiteman (1:29)

Fewer people, but hopefully more revenue, right? As usual in this industry, everyone's following Delta's playbook. And that is basically how this industry has worked since about 2008, when Delta went bankrupt, ironically, they followed them there too. But back in 2024, the Delta Investor Day, they said they are done treating upgrades as perks. They see them as revenue opportunities. And fast forward two years, today, more than three quarters of Delta tickets have at least one upsell. That could be, you know, just baggage or it could be economy plus or whatever.

So yeah, all of the full service airlines are regenerating their cabins. They're trying to give you more premium seats to sell.

Basically, every time they try this and they say, can we sell this many? And the answer is more. And so that's what you're seeing. Remember, an airline has massive fixed costs per flight. That plane costs X amount, whether it is one person on it or 280 people on it. Any incremental revenue helps there. You know, once you decide you're going to fly the plane, an extra 10 bucks is just revenue on the top. It's not just the premium guys. Southwest is doing their own version of it by charging for seats and charging for bags now. Even Bill Franke, the father of the modern discounters, says Frontier, which is an ultra-discounter right now, even Frontier can learn from it. So this is the way everyone's going.

Matt Frankel (2:53)

Yeah, I mean, you mentioned Frontier. The discounters are hanging on for dear life right now. I mean, what happened with Spirit? Even JetBlue, that's usually considered more of a discount-friendly airline, is leaning into its premium product a little bit more. This does change the business model quite a bit. It kind of starts shifting the airline model to a commoditized business, to a real product ladder, especially for leisure travelers, which historically have not been what you see in first class. We mentioned Delta. Delta already has three different tiers of tickets for both of its cabins. And it's not just that they're trying to directly sell first class to travelers like me.

It's after you buy a ticket, they'll use dynamic pricing to offer you an upsell. And even a little bit more incremental revenue on that, like Lou said, would help. I mean, there have been times when I've upgraded for not very much money.

Delta's premium cabin, not only are three-fourths of Delta tickets now coming with at least one upsell, but the premium cabin now out earns the rest of the plane. Historically, that has not been the case. It's really a smart business decision. And I'm surprised it took Airlines so long to figure out you don't give away what people are willing to pay for. But Delta figured it out, and now everyone else is following suit.

Tyler Crowe (4:11)

I can see the strategy to it. But here's the thing that I keep coming back to it too, is this is an extremely and notoriously cyclical industry. I mean, as you just said, we had bankruptcies during the great financial crisis. And a lot of them during COVID, during 2020, were practically brought to their knees as well. And so like on the, it's so over, we're so back scale, this really screams we're so back. And while I can see the incremental revenue gains, yeah, that makes sense in good times. But as we see with these cyclical industries, during the downtimes, capacity does matter. You still need to put butts in seats.