The Death of First Class

Written by Adam Jankelowitz

I. Introduction
Since the dawn of commercial aviation, airlines have sought ways to utilize price discrimination to maximize profits. With airlines initially focusing on transporting mail, passengers endured flights with numerous stops and sporadic timing. Carriers began to offer passengers more expensive tickets on non-stop flights. Ultimately, in the quest to increase revenue streams, airlines started to focus on passenger flights. Airlines began charging business travelers more than tourists and took advantage of business travelers’ need for flexibility and relative inelasticity of demand. With the introduction of the Boeing 747 in 1969, airlines could further divide aircraft and split the premium cabin into two, business and first class. Now, economy class would be for tourists, business class for business travelers, and first class for ultra-wealthy travelers. New amenities such as larger seats, onboard lounges, and extravagant meals added a little flair to the overall experience in business and first class. While business class is still financially lucrative, first class is not living up to its initial success. In the 21st century, both business class and premium economy have become more profitable than first class, indicating it is time for airlines to shrink their first class cabins or remove the cabin altogether.

II. Comparing Ticket Prices
To determine the cost-effectiveness of first class cabins, the first piece of information needed is the price at which airlines sell first class tickets. This first step in finding the average fare in each class is recording ticket prices from an array of long-haul flights. Specifically, these flights are at least seven hours long, on wide-body aircraft, and fly between two continents. As shown in Table 1, the average ticket price ranges from $1,444 in economy class to $9,289 in first class. While it appears that first class is far ahead of every other cabin in terms of revenue, other factors need to be delineated.

III. Incorporating the Opportunity Cost Factor
Given that aircraft have limited space for passengers’ seats, airlines analyze the use of every square foot on an airliner to maximize profits. With first class seats and amenities taking up considerable floor space, it is crucial to verify that ticket sales recover these opportunity costs. The first step in calculating the opportunity costs present is calculating the footprint of seats in each cabin. As shown in Figure 1, the area taken up by first class seats is far greater than the area taken up by economy class seats – nearly six times as much, on average. These floor space trends help explain why first class tickets are significantly more expensive than other cabins. As shown in Figure 2, the average revenue per square foot is far more constant across cabins, with business and first class both being $302 per square foot. When analyzing the viability of a business decision, considering the profit is just as important as the revenue generated.

IV. Differentiating Costs for Each Cabin Class
Cost is a significant factor in analyzing the profitability of any business decision. Across the four cabin classes, costs vary significantly. For example, the food prepared for first class passengers is, on average, 20 times more expensive than in economy. (Arnot, Chefs at 35,000 Feet: The Secrets Behind Airline Menus, 2019). As shown in Table 2, the costs associated with a first class passenger far exceed those of any other ticket class – shrinking that initial difference in fares.

V. Revenue After Cost Variations Across Cabins
Using the pricing and cost information in the paragraphs above, anticipating the relative profitability of each cabin is relatively straightforward. At an average additional cost of $1,006.68 (Table 2), the average income from a first class ticket reduces to $8,281.97. Business class is cut to $5,261.37, premium economy to $2,523.20, and economy to $1,412.71. While looking at the average total revenue after considering cost differentiation is important, evaluating it on a dollar per square foot basis gives greater insight into the viability of the decision. As shown in Figure 3, the final revenue values all fall between $269 and $322 per square foot. First class pulls in the least revenue per square foot. Even though the difference between business and first class is only 4.23%, when multiplied by the thousands of square feet on an aircraft and the thousands of flights taken, this seemingly insignificant difference balloons into millions of dollars in lost revenue.

VI. Conclusion
Despite the widespread belief that airlines are incredibly profitable and do not need to worry about cross-class profitability, this is not the case. When fuel prices shot up in the early 2000s, airlines had to find ways to cut costs to ensure financial viability. In response, airlines began charging passengers to check bags. Realizing that they had found a new significant revenue stream, airlines continued to charge passengers for checked bags long after fuel prices returned to normal. Although it seems counterintuitive to replace first class seats with premium economy and business class seats, airlines should move in this direction to improve their financial outlook. As a result of the COVID-19 pandemic, airlines are again under the microscope and have been forced to overhaul their operations completely. While it is impossible to predict how the COVID-19 pandemic will impact the future of the commercial aviation industry, it has certainly been a wake-up call for airlines to amend their operations, and it might be the final nail in the coffin for first class.

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