International First Class is Back, Baby!

For the first since joining Lufthansa Group, Carsten Spohr is bullish on the front cabin. How long can this last?

Dear readers,

I rarely eat or drink on airplanes, and I don't like obsequious, over-the-top service. Yet, I love international first class, the small cabin in the front of the airplane that former United CEO Jeff Smisek once called a “money loser.” Unlike business class, which can feel like a youth hostel, first class tends to be private and quiet, with more plush bedding and a larger mattress.

To be fair, I’m the customer Smisek hated, as I use frequent flyer miles or buy cheap cash upgrade offers. But Carsten Spohr, the brutally honest CEO of Lufthansa Group, said many travelers are springing for the first class cabin for the first time in memory, proving yet again the cyclical nature of this industry. What’s old is new again.

A rendering of the new Lufthansa first class suite

"I've been in this job now for nine years," Spohr said last week on the group’s first quarter earnings call. "Every year I have been confronted with the fact that our first class is over-dimensioned, that we should reduce the size. This year is the first year all of my team tells me we need to grow first class — that it is under-dimensioned. I never thought I would ever hear that."

It is an interesting trend. While very few airlines are adding real first class cabins — Lufthansa is an outlier — more are investing in business plus, allowing customers to pay extra for more space, and in some cases, improved service. This group includes JetBlue, Virgin Atlantic, Condor, and the Taiwanese airline Starlux, which calls its product first class, though it looks to me more like business plus.

There might be a few elements at play. First, airlines may have shrunk first class supply by too many seats. Over the last two decades, many airline executives treated first class like Smisek, denigrating it and removing it. There was some demand, just not enough for every airline to have it fleetwide. Second, though Covid concerns are waning, passengers have been craving more space and more freedom from other travelers. And third, even after recent market turmoil, wealthy people have a lot of money, and they want to spend it on luxury goods and services.

It's that third factor Spohr is betting on, and it’s the reason Lufthansa Group is overhauling first class on some jets and introducing it on some new Airbus A350s.

"We don't only see it in aviation," Spohr said. "You see it in high-end cars, you see it in high-end watches, you see it in high-end luxury products. Look at LVMH in France, look at the German car manufacturers, and also the Italian or U.S. upper-end car manufacturers. There is a general trend of luxury, of premium, for those people who can afford it."

Oh, stop snickering.

I know some of you are. Sure, you say, premium demand is hot. But what about when we get a recession, or worse? On this, Spohr made an interesting argument that makes sense, even if it's weird to hear: Many people with enough money to fly in premium classes can afford the cabin, no matter the economic climate. It's the same argument private jet companies make — that as expensive as these products are, plenty of people can afford them in good times and bad. It's just a question of whether they want to spend the money.

"The money is there around the world, and that segment is much less sensitive to economic developments around the globe than other segments of our customer group," Spohr said.

It’s not just first class, of course. Spohr says he’s just seeing a trend in which people are willing to spend more on a more luxurious experience — something that’s true for business class and sometimes even premium economy.

Increasingly, these travelers are spending business traveler-type money. Amazingly, Spohr said, the number of Hon Circle members — the highly coveted top tier of the loyalty program — is up 20 percent compared to 2019, even though corporate business revenue is still down 30 percent, while volume is off by 40 percent.

"The trend towards higher value bookings for private travel remains completely unchanged," he told analysts, echoing his remarks on recent earnings calls. "Leisure travelers almost completely compensate for the share of business travelers in our premium classes who have not yet completely returned."

I mostly agree with Spohr's sentiments about premium demand, especially since it jibes with what Delta president Glen Hauenstein has said— that once you go into a premium cabin, you never want to return to economy. But not every business class customer is so price insensitive. Some people splurge, while others like fare sales.

This dichotomy makes me question how long Lufthansa Group will be able to brag about premium seat sales. It may come down to the share of premium customers who will buy the luxury product, no matter the price, against the share who may be splurging on a one-time trip. Lufthansa may know the split of how many of its customers belong to each group, but I don’t.

What do you think? Is Lufthansa's first class bump sustainable? What about in business class?

What’s the latest for the new business class?

I like Lufthansa's take on premium demand more than I like the strategy behind its new business class, part of its Allegris platform. The company intends to sell seven types of business class seats at its long-haul airlines. While I am sure there are seven types of business class travelers, each of which value a different seat attribute, I am not sure any airline can choose a LOPA that optimizes for passenger preferences across routes, seasons, and time of day. Lufthansa is bound to get the supply-and-demand calculations wrong.

As a traveler, though, I look forward to trying it. Lufthansa Group announced the first airplane with the configuration will be a Lufthansa Boeing 787, due in the fourth quarter, followed next year by Lufthansa’s A350s, which also will have the new first class. Swiss will get its first Allegris aircraft by 2025.

The new business class. Each of seven seat types will have its own price point. Rendering: Lufthansa

This is part of Lufthansa Group’s strategy to standardize more purchases across its airlines. The company is buying 30,000 seats, presumably at a nice discount.

"Even if these come from the same manufacturers, they will have an individual look and feel on board of our airlines, in line with the positioning of the respective brand," Spohr said.

Why Lufthansa Group covets ITA

Photo: Ita Airways.

Lufthansa Group wants Italy’s ITA Airways for geography, capacity, and the strength of the local market, Spohr said. First, he said, Lufthansa Group's most southern hub is Zurich, which puts the company at a disadvantage in Africa and Latin America. A Rome hub would help it capture a bigger slice of two growing markets, Spohr said.

Second, on capacity, Spohr said Zurich and Frankfurt are full, while Munich and Vienna still have some room. Rome, though, offers more space for extra flights, both in runway and terminal capacity.

Third, Spohr said Lufthansa Group is intrigued by the inbound tourism from Rome, especially from the United States and Asia. Milan is the better outbound market, he said, "where we have some other plans."

While Spohr said he didn't want to divulge many details, he briefly sparred with an analyst who asked about ITA’s short-haul operation. Would Lufthansa want to compete against Italy’s defacto flag carrier, Ryanair? Of course not, the CEO said.

"On short haul, we never said that we want to go up against the low-cost carriers, and we would conquer the Italian domestic market," he said. "I believe there's only one country where the national carrier was successful to defend short haul besides its hubs, and that's Germany. ... And we don't think Italy would be a second one."