The Battle for First Class

By Coco Masters

It takes a lot for me to get giddy over an ottoman--although less so at 35,000 ft. And much less so for a flat bed and my own 21-sq.-ft. "suite"--a good 60% larger than my drone-class cubicle at the office. The amenities kit rivaled a department-store cosmetics counter and contained not the usual pair of amorphous tube socks, but ones with heels. From one of my four windows, Maserati champagne cocktail in hand, I spotted an easyJet plane, its 34 rows brimming with my people: coach folk. But today I had traded my peanuts for canapes. All 48 seats on this 757 built for 220 passengers were front-of-the-bus as Flight 3 flew from London's close-in Stansted to New York City's J.F.K. on EOS Airlines. A niche carrier launched October 2005, it is the first of three start-ups that offer premium- and business-class-only flights between the two cities.

Catering to premium-class travelers is not new. Lufthansa, Swiss, KLM, Alitalia and others have flown smaller aircraft for that purpose on trade routes such as Stuttgart to Detroit. What's new is the leap by private investors into the transatlantic market. They are raising capital, buying planes and negotiating for airport slots--and it's starting to look like a trend. L'Avion began service between Paris and New York City on Jan. 3; Silverjet launched its single route between New York and London on Jan. 25.

The timing couldn't be better, as air travel is approaching pre-9/11 levels. Moreover, U.S. financial houses are rapidly expanding in London, and the merger wave is in full bloom in Europe. "I'm surprised that EOS and MAXjet are still with us," says Andrew Lobbenberg, a transport analyst at ABN AMRO, "but they've gotten lucky because of the transatlantic cycle. Business travel is booming right now."

The traffic is so lush that established carriers like British Airways, American, Continental and United have shifted some of their capacity to accommodate increasing corporate demand. And since landing slots in London's Heathrow are still heavily regulated by treaty, these legacy airlines have been collecting rent from premium passengers. A first-class round trip on the New York--London route of British Airways, for example, can cost upwards of $14,000; its Club World, or business class, about $9,600. Yet coach can be $500 for a round trip.

That leaves a huge price gap for the likes of EOS, whose one-class structure can deliver a top-shelf product at a relatively low price and still make a decent profit, says EOS founder and strategic director David Spurlock. "You now have this new entrant that is zealous about delivering outstanding service and quality--and that's all they do. The large enterprise--which is juggling economy, strategies, pressures from discounters, international routes with domestic routes--has a hard time keeping pace." EOS's usual fare to London, $7,500, undercuts BA's by 20%; its lowest fare is $3,280. Silverjet weighs in at $1,798.

Industry experts estimate that the new luxe carriers--EOS, Silverjet and MAXjet--may have as much as 20% of the premium traffic on the $1.75 billion New York--London route, known as NYLON in the business. The roughly 3,600 seats in premium cabins, about 30% of the total, represent more than $1.25 billion, or 70%, of the available revenue. And 100% of the profit.

That's why the big carriers are not going to take the front-of-the-plane challenge lying down. As part of an 18-month rollout, BA will spend $190 million on improvements to its Club World product and its "2.0" plan for flat beds, which BA originated in 2000. "We far outdeliver any one of these start-ups because we cover the bases," says Woody Harford, BA's senior vice president of sales and marketing for North America. BA and American regard their worldwide networks and frequent-flyer miles as key retention devices. "If you don't invest in flying to Hawaii or the Caribbean, you lose an edge when you're competing in a J.F.K.-Heathrow market," says Mary Sanderson, spokeswoman for American Airlines, which has 18% of the J.F.K.-Heathrow seats and just invested $20 million to upgrade its 767s. "MAXjet is offering what we did in business 15 years ago," says Harford. As for EOS, he adds, "Of course we need to compete with them vigorously." Then he notes, "The jury's not out on the business model."

The model seems like a logical one, though. A single-class cabin streamlines onboard service and crew training, and using smaller jets, like 757s, instead of 777s, lowers fuel and maintenance costs. So the new entrants can offer competitive premium service at a reduced price.

But it's not all smooth air for the start-ups. Virginia-based MAXjet launched in November 2005 with 102 all-business-class seats on a 767 flying between J.F.K. and Stansted. Price: $1,500. But MAXjet's expansion to the Washington-Dulles/London route has floundered. The company suspended that service and says it will resume in May. Despite talk of mechanical problems and low load factors, CEO William Stockbridge, who abruptly took over after Gary Rogliano stepped down just a year after launch, says MAXjet will soon add two jets to its fleet, making a total of five, and offer another destination in the summer. Says analyst Lobbenberg: "Its price proposition is perfect, but they need to sharpen up the operational execution."

That's where EOS has excelled. Focusing on business flyers has yielded both cachet and efficiency. "Ours is the difference between shopping at Tiffany and shopping at Sears," says Spurlock, who spent five years at BA. "If you produce a product that has a higher quality, that is somehow more nimble and you can be more efficient, that business is going to succeed," he says. EOS has added a third daily flight each way and has been negotiating feverishly for new jets and planning additional routes after raising another $75 million in financing.

The only public start-up of the group, Silverjet, splits elitism and efficiency down the middle. It's not every day that you see the CEO of an airline collecting trash and empty champagne glasses. But Lawrence Hunt, 40, is a Richard Branson-- style British maverick who rolls up his sleeves, raises $55 million in capital and takes flight with 100 business-class seats on a 767 just eight months later; most start-ups take two years. Hunt expects to break even in six to eight months and will soon add a second and a third plane. Silverjet looks to be going the way of Hunt's six previous start-ups in the technology and travel industries. Its stock ($3.08) is already trading at twice what investors expected, he says.

My flight on Silverjet had a few firsts: my first time passing through security and boarding a plane in seven minutes; the first women-only loo in the troposphere (the result of a heartfelt suggestion from a woman at Heathrow); the first carbon-neutral airline, which takes up to $23 from round-trip fares to fund projects that neutralize carbon emissions.

It was economics rather than environment that attracted Nigel Hysom and Craig Thrussell to Silverjet, whose $1,800 price appeals to a category of flyer called SMEs, for "small and medium enterprises." The two London-based financial consultants fly as often as twice a month and usually take Air India because of its low $2,000 round-trip business fare. "We don't have the buying power to fly BA or Virgin," says Hysom. "As a growing business, we have to look at costs--and a flat bed is everything."

For now, the transatlantic market, buoyed by corporate travel, can keep a lot of planes in the air, but should the traffic slow, the incumbents could always resort to price wars, a tactic they've used in the past to shoo away upstarts. The upstarts, on the other hand, need new markets, which could test their operating capability. "EOS is still the gold standard, but Silverjet is proving that the alternative carriers are here to stay," says Michael Holtz, owner of the Smart Flyer, a high-end travel agency in New York City. As a publicly traded company, Silverjet will be under pressure to deliver profits. Lobbenberg says the airline is likely to compete with MAXjet in efforts to capture the bottom end of the up market.

As for EOS, UBS transport analyst Tim Marshall says, it "would be prudent to target the SME and leisure market rather than the global corporates," arguing that network depth, breadth and frequency are important to corporate flyers. "The presence of EOS may actually stimulate the business-class leisure market," says Marshall.

That might allow many people, like me, who are now crammed in coach to upgrade. And it would give business flyers more flexibility. Simon Martin, a British futures exchange analyst who usually flies BA, Delta or American, was on an EOS flight for two reasons: he didn't want his business compromised by potential labor troubles (since resolved) at BA, and he was the company's guinea pig for finding other airline options. He would report to colleagues that EOS was "slightly better" than BA's first class. "It's a dirty job," he said, after finger sandwiches and a sweet cheese souffle, "but someone's got to do it."