Will All-Biz Airlines Fly?

Airlines like Eos and Virgin hope to siphon away business-class passengers from major carriers. Does the strategy have wings?

by Courtney Weaver

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Silverjet offers the only separate ladies' room on a commercial aircraft, and its flight attendants are trained in line dancing in order to maximize the grace of their service. But can line dancing and a unisex loo help sustain an airline?

The London-based Silverjet is one of four premium-only startups, which will soon face competition from British Airways (BAIRY) and Virgin Atlantic Airways, the latest airline to announce a business class-only plan. Launching its service in 12 to 18 months, Virgin will fly transatlantic routes from New York to European destinations that could include Paris, Frankfurt, Milan or Zurich, and later London.

Business Class for Nonbusiness Travelers

When U.S. carrier MAXjet debuted its service in November, 2005, it—along with fellow U.S. carrier Eos, Silverjet, and France's L'Avion—pioneered a market, largely aimed at noncorporate though affluent business and leisure travelers looking for business-class service for less.

With fares of less than $6,000, MAXjet felt it could steal away customers who were paying that amount or more for a business-class round-trip ticket on one of the large carriers. Though corporations typically fly employees on tickets bought wholesale, smaller businesses cannot afford such volume discounts. The idea is that there are enough such travelers in that segment who would be willing to shell out $3,000 for a round-trip ticket.

All of the premium-only startups, however, have yet to reach a profit, and while some of the services predict becoming profitable within two years, the questions remain whether any of the small business-class-only airlines can beat their bigger competitors and whether a market for such a service exists at all.

Why So Many Startup Carriers?

Regardless of whether premium-only carriers eventually do achieve long-term success, the market for premium travel is, in general, a strong one. According to the December, 2006, Monitor from the International Air Transport Assn. (IATA), premium fares accounted for 12% to 14% of traffic on North Atlantic routes in 2006. However, for 2006 the growth rate for North Atlantic premium traffic was below average at 3.5% and less than the 4.3% growth rate for overall international premium traffic.

These are numbers Virgin Atlantic's Director of Communications Paul Charles still thinks will work in Virgin's favor. "There's clearly a market out there for this kind of product, but the jury's still out on how many such carriers can exist," he says.

Virgin's decision to specifically service Europe and the U.S. follows on the April 30 Open Skies Agreement, which will allow free market competition for European and U.S. airlines in those areas—a decision that will heighten the competition among transatlantic services, according to IATA's spokesman Steve Lott.

With Boeing's Director of Marketing Drew Magill estimating that the success rate for all startup carriers over the past three to five years averaged 50%, it appears unlikely that the market will support six premium-only carriers, especially when the legacy carriers will be entering the competition with a serious leg up.