Airline Industry 109: The cost of your comfort in the sky

Class is back in session 🙂 (Apologies for the long hiatus. Sadly it might not be the last but I’ll still keep coming back :-))

One of the main product differentiators airlines have is what they offer in their cabin. Over the past decades, as the airline space has become more competitive, carriers have been consistently improving what they offer – constantly pushing the bar higher in order to stay in the game. As the pictures in this Daily Mail article on British Airways’ First Class over the years shows, where a reasonably spacious cabin with upright seats that reclined slightly was considered the best, nowadays, anything less than a seat that reclines to full flat – with a large personal video screen – is considered a travesty. This is especially the case on long haul flights where passengers are commonly in the aircraft for more than 8 hours – sometimes even as much as 17 hours!

Passengers love comfort. They aren’t necessarily willing to pay more for it though. Especially not when your competitor offers the same (or better) for the same ticket price. Therefore, a constant challenge airlines face is how to keep improving their product while keeping their product cost relatively low. These costs, as I’ll illustrate below, are quite significant in their own right.

For the purpose of this illustration, let’s assume the following:

• A long haul aircraft with 200 seats in economy and 30 premium seats (This is roughly the size of a B787 or an A330)
• Economy seats recline about 4-6 inches
• Premium seats recline to full flat
• Personal in-seat video screen for each passenger but varying in size between Economy and Premium

IFE

IFE is an acronym for In-Flight Entertainment. In the past this was a screen (or screens) broadcasting the same movie to the entire cabin. This progressed to individual screens playing different movies off tapes – each movie had its own channel and would play on a loop for the entire flight. Modern systems have an individual screen for each passenger and play the content on demand (They call these AVOD systems or Audio/Video On Demand). Since an AVOD system is digital, the content is not limited to movies but also includes TV shows, music and games.

Each economy screen could cost region of $5000-$7000 depending on the size – and no, I didn’t add an extra zero by mistake. The high cost is driven by the certification requirements for safety and ruggedisation for heavy use (The average screen will be used for at least 10 hours each day, every day and is expected to last at least 6 years). Each Premium screen could cost twice as much.

On top of the screens you have to pay for:

1. Head end servers to store your digital content,
2. Wires and cabling – and there’s a lot of this in an almost 200ft long a/c!
3. Control units for each seat
4. Non-Recurring Design engineering work
5. Design engineering work for the graphics the users will see
6. Certification Testing

All told, this will come to $4-7M – give or take a few million dollars.

Seats

Economy seats are sold in doubles, triples or quadruples. A basic triple may cost $10,000 and that price will rise depending on the features selected e.g. seat fabric,  moveable headrests, leg rests etc. So on the conservative side, we’re looking at $700-800K for the economy seats.

Premium seats – especially modern premium seats – are a lot pricier. With all the bells and whistles that come with full flat seat, the price range for a single seat is $40-60K. This would bring the Premium seat total to $1.2-1.8M.

On top of the price of the seat you again have to pay for:

1. Wires and cabling for the seat controlled features like overhead lights, attendant call etc
2. Non-Recurring Design engineering work
3. Certification testing

Total for seats is therefore about $2.5-3M

Galleys and The Cabin Items

The galleys – where the meals on the aircraft are prepared – are the other big cost item in the cabin. That, in addition to things like carpets, mood lighting systems and wi-fi connectivity could cost $3-5M depending on the elaborateness of the fabric design, lighting system, features of the wi-fi etc.

Like for the seats and IFE, there is also design engineering work and certification testing that most be completed

 

Therefore, this illustration comes to between $9.5 and $15M (In reality the cost would be higher once you add in the manufacturer’s selectable features for the cabin.)  This is 5-7.5% of the list price of a similar aircraft (see this post on SPVs for approximate list pricing of a 787) – though it’s a much higher percentage of the actual price following negotiated discounts.

The other aspect to factor in is the timeline. Since most of the items are custom modified to match the airline’s branding and product requirements, this design, certify and build process takes 2-3 years to complete. In addition, it is likely this product will need to be refreshed every 5-7 years or so in order to keep up with technology trends and market expectations.

In summary, that means $10-15M per aircraft – every 5-7 years – in order to stay competitive with the market. Regardless, of the number of aircraft in your fleet, those numbers very quickly stack up. Especially when you consider that passengers won’t pay you extra for a refreshed product and financiers are hesitant to finance such a customised item that is not easily transferred in the event it needs to be repossessed.

So the next time you feel that the cabin in the aircraft you’re flying in and is a bit dated, spare some consideration for how much it might cost to upgrade it, how long it will take and the reality that it’s unlikely you will be willing to pay more on your ticket to get it done 🙂

This ends this lesson.