Jules Dupuit gave the classic account of the indignities of second class travel, and the economics behind them:
It is not because of the few thousand francs which would have to be spent to put a roof over the third-class carriage or to upholster the third-class seats that some company or other has open carriages with wooden benches … What the company is trying to do is prevent the passengers who can pay the second-class fare from traveling third class; it hits the poor, not because it wants to hurt them, but to frighten the rich … And it is again for the same reason that the companies, having proved almost cruel to the third-class passengers and mean to the second-class ones, become lavish in dealing with first-class customers. Having refused the poor what is necessary, they give the rich what is superfluous.
For anyone who has experienced the almost cruel service meted out to those at the back of the plane by supercilious flight attendants, or the (comparatively) lavish food and drink in the business class cabin, Dupuit's explanation seems compelling. Yet there are a few problems with using it to explain the existence of executive class on flights within Canada.
First, if business class cabins are simply a means to persuade those who can afford more expensive tickets to pay more, why don't all airlines have them? Why are there egalitarian airlines like WestJet, which (for now) offer all passengers the same seats and service?
Second, airlines have many means of inducing some passengers to pay more than others. Why bear the expense of maintaining a business class cabin when there are cheaper-to-implement price discrimination schemes available, such as higher charges for last minute, flexible or refundable tickets?
Finally, from my admittedly limited experience, it seems that only a fraction of those who fly Executive Class within Canada actually pay for their ticket. The SuperElite - those who fly more than 100,000 miles a year - are routinely upgraded to executive class, as are some members of the lesser Elites. So, too, are Air Canada employees. The differential treatment of executive and economy passengers cannot be explained as soak-the-rich price discrimination when a good proportion of Executive Class passengers are not paying higher prices.
So what explains the existence of Executive Class on Air Canada, the non-existence of business class on WestJet, and WestJet's recent announcement that they will be introducing new "premium economy" seats?
The comfortable seats at the front of the plane are part of the "refined, personalized travel experience" Air Canada offers as part of "exclusive Privileges" available to those flyers with "Top Tier status". They aren't there so that Air Canada can charge frequent flyers more. They exist so that Air Canada can give frequent flyers better service, even those who haven't paid for an Executive Class ticket.
Frequent travellers make up a disproportionate share of an airline's business. It makes sense to buy their loyalty with Maple Leaf lounge passes, priority boarding and free upgrades. Booze on planes is simply another thing that (some) rich people pay less for than other folks.
So why doesn't Westjet have a business class cabin? When Westjet began operations in 1996, it had to take passengers away from Air Canada in order to be successful. Trying to persuade Air Canada's SuperElite to give up their lounges and upgrades to fly on an upstart discount carrier would have been difficult - especially since frequent flyers often don't pay for their own tickets, so are less sensitive to price, and more sensitive to comfort and convenience, than other travellers.
Westjet chose, instead, to target those in the middle and the back of the plane, telling them "just because you pay less for your flight, doesn't mean you should get less." Air Canada has long been vulnerable on the service front, so that's where WestJet took them on: "our entire corporate culture has been built around caring for you, our guests, by providing a great guest experience."
Part of that guest experience is attitude, for example, flight attendants who pay attention to the passengers while serving tea and coffee, instead of chatting with each other. It's human nature, however, to care about relative status. No matter how comfortable my seat is, I will feel irked if someone else has a better one. Eliminating business class removes that nagging feeling of inferiority economy class passengers experience, giving egalitarian airlines a competitive advantage in the plebian travel market.
Yet Westjet's egalitarian philosophy is being undermined by its very success. Westjet now has a loyal customer base. To keep the base faithful, it has to reward their loyalty, and give them a reason not to stray. Westjet announced in August that it is introducing "premium economy" seats at the front of the plane - what's the betting that frequent travellers will be routinely upgraded to those premium economy seats?
Also, some of the common folk who have been with Westjet since the beginning are starting to climb the corporate ladder, and fly more and more often. They may be philosophically committed to Westjet, but who doesn't yearn for the comforts of the Maple Leaf lounge? If Westjet hopes to keep those customers, it has to step up the luxury a little.
Westjet's choice not to offer business class was dictated by its position as a new entrant in the airline market. Air Canada's decision to keep its first class is likewise a product of its own history. Before the days of internet booking and complex fare structures, the first class/second class distinction would have been a relatively more important form of price discrimination (On long-haul flights, it's still the case that some people are willing to pay a considerable premium for a seat that is comfortable to sleep in.)
Once an airline has first class cabins, however, it is difficult to eliminate them. The SuperElite might switch to an alternative airline if they had to travel in the economy cabin. Air Canada is also a unionized airline, with a history of somewhat fraught union/management relations. Air Canada's employees might become seriously disgruntled if they had to fly at the back of the plane. Part of the reason why Air Canada planes have segregated executive class compartments today is that it seemed like a good idea thirty or forty years ago.
Of course, I might be entirely wrong in everything I've said here - I don't have any hard data to support my speculations. The important point is that the obvious economic explanation is not necessarily the correct one. Something that looks like a way of charging the rich more may, in fact, be something entirely different.