Can a premium only small airline grow and by how much is the million-dollar question facing La Compagnie. The small French airline flies between Paris Orly and Newark in a Boeing 757 configured in an all-Business class layout. Can the airline expand? And if so where does it stand the best chance of achieving growth?
La Compagnie Business Model
The key to understanding La Compagnie's business model is understanding the economics of air travel. The bulk of the revenue and profit an airline makes is not from the hundreds of passengers flying Economy but in the handful of premium (First and Business) class travelers on board. As a rule of thumb on a standard transatlantic flight, 40% of the passengers are generating nearly 80% of the revenue from a flight, with Business class passengers being the most lucrative. This is why some airlines have abolished First class altogether.
In a nutshell, you can ignore all the marketing hype of La Compagnie being a premium only airline. It is effectively a low-cost carrier that focuses on the premium market. The airline charges less than legacy carriers for premium seats, and the all-premium configuration means its revenue per square foot of cabin space is much higher.
This low-cost model means La Compagnie can compete successfully against bigger carriers; they offer a decent Business class service that is not industry leading but acceptable. They charge lower fares, so it is inevitable that they will attract the more budget savvy business travelers who don’t want to travel economy and are willing to pay a little more.
While it is difficult to see La Compagnie expanding to a large number of airports, it should be able to operate from heavy business cities like Frankfurt, Paris, Amsterdam, London, or even Brussels.
Aviation Trends
Traditionally, Business class travelers were the mainstay of the aviation industry. However, during the 90’s and 00’s, as companies became more cost averse they reduced their spending and many executives began to fly in economy or premium economy.
Over the last few years, more and more airlines hit the skids financially and started to struggle, as low-cost carriers emerged and started to challenge their dominance in the economy market. The airlines responded by cutting perks and services to economy passengers and even started cramming more into the aircraft by reducing seat width and pitch. You can see evidence of this in how many airlines flying the Boeing 777s are going for a 3-4-3 configuration in economy, instead of the usual 3-3-3 configuration.
This literal and figurative squeeze on economy travel, coupled with the economic recovery of the last few years, has again pushed up the demand for Business class travel. Passengers and companies feel they would rather pay a little more for better perks and comfort, than just drive to cut costs.
With demand growing for Business class travel, and airlines investing more in their hard and soft products, La Compagnie stands in a great position to take advantage of this growth.
Brexit, The Wild Card
We recently outlined the possible disruptions caused to European and transatlantic aviation by the prospect of the UK leaving the European Union. Two things that have been confirmed is that the UK will be leaving the US-EU Open Skies agreement and the EU Open Skies agreement. Depending on the future agreement, La Compagnie stands to gain a lot.
The key to any future agreement is the 6th or modified 6th freedom of the air; which is defined as:
“The right to fly from a foreign country to another while stopping in one's own country for non-technical reasons.”
A current example of this is British Airways selling a ticket from Milan to New York via London Heathrow. Various Countries do place restrictions on 6th freedom rights. These restrictions mean that you can not purchase a ticket from Europe to the US with a Gulf carrier.
The transatlantic route from the US to Europe via the UK is the most profitable in the world, including in the premium market segment. Currently, a large percentage of traffic transits in London on its way to Europe. It is possible that some of the big European players (Lufthansa/Air France/KLM) will be putting pressure on their governments to deny or restrict UK carriers’ 6th freedom of the air.
This would mean that passenger flying the same JFK to Milan route would now have to transit via a European Union airport instead of London Heathrow. This is the kind of increase in business that Brussels, Frankfurt, or Paris would love to see.
Finite Growth
La Compagnie has recently revealed its new revamped Business class seats and configuration, that will be installed in its Airbus A321 Neos. The improvements mean it can compete with other legacy carriers and start attracting their customers with a great hard and soft product and lower fares. However as much as there are opportunities for growth, it will remain limited since the airline only targets a narrow pool of premium customers!