Three years ago, American Airlines (NASDAQ: AAL) announced that it would follow many of its international rivals by creating a true premium economy section for its long-haul fleet. Less than a year later, Delta Air Lines (NYSE: DAL) jumped on the bandwagon.
At the time, the third U.S. legacy carrier -- United Continental (NASDAQ: UAL) -- indicated that it was also studying the idea of adding premium economy sections to its fleet. However, it had bigger fish to fry, as the company was just embarking on a multiyear turnaround plan at that point.
Not surprisingly, United eventually came to the same conclusion as American and Delta, and it began retrofitting its widebody fleet with new "Premium Plus" seats earlier this year. Last week, the carrier finally began sales for this important new product.
Finding a middle ground
In the decade since the Great Recession, American, Delta, and United have invested huge sums to upgrade their international business class cabins. Recliner-style seats have been replaced with seats that convert into fully flat beds, providing a better night's sleep on long red-eye flights. This has allowed the airlines to capture ever higher fares from business travelers, who tend not to be very price-sensitive.
As a result, most leisure travelers have been priced out of the market for international business class fares. Extra-legroom coach seats are much more affordable, but aside from a few extra inches of seat pitch, they don't offer many advantages.
International premium economy sections bridge the divide between business class and the back of the plane. For American, Delta, and United, the seats typically offer 38 inches of pitch -- compared to as little as 31 inches in coach and 34 inches for a normal extra-legroom seat -- plus a wider seat, more recline, and other special amenities.
United Airlines joins the club
United plans to copy American Airlines by keeping its Premium Plus section relatively small, with between 21 and 24 seats, depending on the aircraft. That should allow it to keep fares high. By contrast, Delta went in the opposite direction by installing 48 of its "Premium Select" seats on each of its Airbus A350s.
Premium Plus seats will come preinstalled on United's new Boeing 787-10 planes. The rest of its fleet will need to be retrofitted with the new section. While the modifications began earlier this year, the company is less than 10% of the way through the process so far.
Since aircraft substitutions are inevitable from time to time, United Airlines has been selling the Premium Plus seats as regular extra-legroom seats up until now. This is a wise choice. It's better to leave money on the table and delight some loyal customers with upgrades to the new premium economy seats rather than risk alienating people who paid for Premium Plus if the product ends up not being available due to an aircraft substitution.
However, United expects to install the new seats on most of its widebodies by the end of 2020. By next spring, it will have enough of a critical mass of retrofitted planes to deliver the product reliably. Accordingly, last week, the carrier began ticket sales for Premium Plus seats for 25 daily round-trip flights on 21 routes -- in most cases, effective March 30. (A few of the flights will switch over to the new configuration in April and May.)
The initial batch of routes getting Premium Plus includes several of United's longest routes, like Newark-Hong Kong and San Francisco-Tel Aviv. It also includes other high-profile routes like San Francisco-Tokyo and Newark-Paris.
There's substantial upside
Over the past two years, management's strategy of accelerated growth in the domestic market -- particularly in Chicago, Denver, and Houston -- has paid off for United Airlines. Unit revenue has been rising strongly as the increase in connecting flight options has helped United regain market share, while higher asset utilization is starting to reduce nonfuel unit costs.
The introduction of Premium Plus sections beginning in 2019 should lift unit revenue on international routes. Indeed, Delta's initial Premium Select rollout was so successful that the carrier decided earlier this year to install Premium Select sections on its entire international widebody fleet, rather than just a few dozen planes that serve the longest routes.
While United Airlines is still unlikely to catch up to industry leader Delta Air Lines in terms of profitability, the rapid rollout of Premium Plus over the next two years should help it improve its profit margin and narrow the gap.
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