Royal Treatment; Corporate travelers are taking to the skies again and getting a lot more for their money. Today's business class looks like yesterday's first class. That's great for executives, but what does it mean for the airline industry?

Byline: Rana Foroohar

Business-class travel used to mean some nice extras--a bigger chair, more entertainment choices and maybe a better meal. But these days, corporate travelers can increasingly expect five-star service in the skies. In Virgin Atlantic's Upper Class Suites, which debuted last year, passengers get to sit in leather armchairs, sleep in full-length beds with mattresses, sip champagne all night and order up gourmet dinners whenever they feel like it. They can also enjoy complimentary massages and manicures, designer pajamas and limo service to and from the airport. In short, full-on, first-class service--for the price of a typical business-class seat. The suites, which are currently being added at a rate of about one Virgin plane every week, took $80 million and two years to develop. But already they're paying off: last month the company announced a major expansion thanks to a rebound in business travel and a strong demand for the new high-end product.

The fact that business travelers are once again forking over thousands of dollars for premium service is good news not just for Virgin, but for the entire industry. After all, premium travelers--usually corporate types flying first class or business--are the backbone of the airline business. And over the past few years, their purse strings have been tighter than ever, forcing airlines to rethink cabin economics, and in some cases, eliminate first class altogether.

Thanks to what the travel industry grimly refers to as "the four horsemen of the apocalypse"--terror, recession, war and SARS--business travel has either shrunk or remained flat for the past three years. This year increased consumer confidence and a jump in cross-border mergers-and-acquisitions activity (the most travel-intensive kind of business), means that business travel is predicted to grow more than 4 percent. "When the economy is soft, business travel is one of the first things to be cut," says Rick Miller, vice president of the World Travel and Tourism Council. "Over the last few months we've seen that companies are more willing to put their people back on the road."

The question is whether the growth will translate into profitability for the airlines. Historically, first class and business class have represented only about 20 percent of airline traffic but as much as 80 percent of its profits. Over the past few years, a variety of factors have been converging to change that equation. For starters, both business and economy class have been getting cushier--a phenomenon the industry calls "ratcheting." Even before carriers like Virgin took the trend to new heights, business class had been moving toward the kind of service that was once the prerogative of first-class customers. Likewise, many airlines have introduced premium economy services, with just enough comfort to lure travelers on the border between business and economy.

There are still growth areas for premium travel--newly affluent business people from developing countries like China and India, and an increasing pool of rich baby boomers who want to travel in style. But those new customers have access to another cost killer: the Internet. Karen Medweth, a senior consultant at the U.K.-based International Bureau of Aviation, says, "The Internet has created more transparent pricing, which means more choice and competition." Translation: flat or even lowered fares in all classes. Online travel sites are increasingly tapped not only by leisure travelers but by corporate travel managers looking to find the best business deals. There are even sites like firstclassflyer.com, which specialize in finding cheaper luxury flights for executives. The bottom line? "It's debatable whether the 80-20 model will continue to hold," says Medweth.

The rise of low-cost carriers like Ryanair and JetBlue has put even more pressure on the beleaguered industry. Experts say that since 2001, major airlines' revenues have fallen around 10 percent, and some doubt whether the numbers will ever fully rebound. The U.S.-based National Business Travel Association reports that more than 60 percent of its members (mainly big ...