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Battle to fly high with business passengers

16 Oct 2012

Sydney Morning Herald

By Tony Webber

Associate Professor Tony Webber has written about the ongoing price war between Qantas and Virgin in the domestic Business Class airline sector, for the Sydney Morning Herald.

The Bureau of Infrastructure, Transport and Regional Economics (BITRE) once split its collection of domestic air passenger volume data into premium (business class) and non-premium (economy) traffic. That data collection split stopped in early 2011, at which point the data indicated that only around 3 per cent of passengers travelled on business class fares domestically in Australia.

This percentage is not likely to be materially different today, despite Virgin Australia's foray into the corporate market.

While domestic business class fares in Australia are currently at levels not seen for more than a decade, these fares are purchased by a very small proportion of the air travelling public, reflecting the small percentage of seats in the domestic air market that are allocated to business class.

As a practical illustration of this, the QF471 flight from Sydney to Melbourne at 7.10am involves the use of a Boeing 737-800 aircraft with 12 business class seats out of 168 in total, representing just 7 per cent of seats. At a load factor of 58.3 per cent in the business cabin (with?? seven passengers) and 80 per cent in the economy cabin (with 125 passengers), the business class mix of passengers on the aircraft is just 5.3 per cent.

Or on Virgin Australia flight DJ810 on the same city pair at 7.15am using the same aircraft type configured with business class seats, the number of business class seats is 8 out of 176 in total. At the same load factors, this generates a mix of business class passengers of just 3.3 per cent.

Business purpose

The real story behind domestic business airfares relates to the price paid by business purpose passengers who travel in the economy cabin, as opposed to passengers who travel in the business cabin.

While business class passengers only represent between 3 per cent and 5 per cent of domestic passengers who travel by air, according to National Visitor Surveys overseen by Tourism Research Australia business purpose visitors represent 40 per cent of overnight visitors and 70 per cent of day visitors that travel by air.

Presumably the incredibly high discount on business class fares at the moment is an attempt to attract business purpose customers that are flying in the economy cabin to consider flying in the business class cabin.

Economy fares

Economy class fares can be split into three groups - fully flexible or refundable, restricted or non-refundable, and best discount or lead-in. It is conceivable that business purpose and corporate passengers that fly in the economy cabin could pay all three different fare types.

They have a strong preference, however, for tickets that are refundable and/or movable to account for the fact that meetings may finish earlier or later than scheduled, requiring a rescheduling of flights. This includes tickets such as Virgin Australia's "Flex" ticket or Qantas' "Fully Flexible" ticket.

Fully-flexible fares have moved in the complete opposite direction to business class, restricted economy and best discount fares in recent times, according to BITRE data.

Over the past?? four years fully-flexible fares have risen by 58 per cent, which is an increase in compound annual terms of?? more than 8 per cent per annum. Over the same time period, restricted economy fares fell by just under 8 per cent per annum, while best discount fares have fallen by almost 2 per cent per annum.

Restricted economy airfares in 2012 have fallen to levels that are at the lowest point since collection of this fare data by the BITRE began a decade ago, while best discount fares are consistently at levels not seen for more than two decades. This is the result of a glut of low cost capacity, and more intense competition for leisure passengers.

Corporate war

The impressive growth in flexible fares relative to business class fares suggests that the domestic carriers are working exceptionally hard to attract passengers to fly at the front of the plane in business class, but "penalising" business purpose passengers, in a relative sense, if they choose to stay at the back of the plane but fly on a fully-flexible ticket.

The corporate war will be fought over business purpose fully-flexible fare-paying passengers not business class passengers. If Virgin Australia really wants to prise open the corporate market from the seemingly monopoly grasp of Qantas, it needs to persuade these fully-flexible flyers to fly on Virgin.

This is where there is money to be made, especially when the economy is strong. They don't need to attract passengers into business class - they need only to attract them into fully-flexible economy.

Shift from leisure

The restricted economy and best discount fare movements over the past number of years helps to explain why Virgin Australia has shifted its focus away from leisure and towards the corporate market.

As the highest cost of the low-cost carriers in Australia, Virgin Australia simply couldn't sustainably compete for the price-priority leisure traveller. It quite rightly converted its business model to one in which there is a greater weight towards the corporate traveller, a segment of the market in which Virgin once again becomes the lowest-cost carrier.

At the moment the move appears to be paying some dividends. The next half-yearly profit and loss statement will shed more light on whether this is indeed the case.

Tony Webber is an Associate Professor at the University of Sydney Business School.

First published in Sydney Morning Herald




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