Cheaper by the mile

Are long-haul low-cost air­lines here to stay?

Business Traveller (Asia-Pacific) - - OPINION - JOHN STRICK­LAND DIREC­TOR OF JLS CON­SULT­ING

Long-haul low-cost car­ri­ers (LHLCCs) op­er­ate the air­line busi­ness model of the mo­ment. Some would ar­gue we’ve been here be­fore, with affin­ity char­ters (get a group to­gether and travel cheaper), or with Laker’s Sky­train of the 1970s, or in­deed nu­mer­ous other it­er­a­tions of long-haul char­ter flights. To­day’s LHLCC air­lines are pric­ing their fares low to steal traf­fic from in­cum­bent car­ri­ers on ex­ist­ing routes; but more sig­nif­i­cantly, they are also stim­u­lat­ing new traf­fic and open­ing up new mar­kets.

They are be­ing aided by a new gen­er­a­tion of fuel-ef­fi­cient air­craft, such as the B787 Dream­liner or the A350, both of which carry fewer pas­sen­gers than pre­vi­ous wide-bod­ied air­craft. Less fuel con­sump­tion and fewer seats re­duce risk when test­ing new mar­kets. Two com­pa­nies are tak­ing the lead: AirAsia X op­er­at­ing out of Malaysia in the Asian mar­kets, and Nor­we­gian in the Euro­pean to US mar­kets. Be­ing pop­u­lar and at­trac­tive to cus­tomers is one thing; achiev­ing prof­itabil­ity and long-term sus­tain­abil­ity is an­other, how­ever.

To date, AirAsia X has de­liv­ered lim­ited prof­itabil­ity, while Nor­we­gian turned in a sig­nif­i­cant loss for 2017. We are go­ing to see more LHLCCs ar­rive on the scene, but I’d be sur­prised to see the level of suc­cess that’s been wit­nessed for short-haul LCCs. There are many in-built chal­lenges to de­liv­er­ing the profit mar­gins needed to pay for the new and ef­fi­cient, yet ex­pen­sive, air­craft that air­lines such as Nor­we­gian have on or­der.

Us­ing low prices to stim­u­late traf­fic re­sults in more reliance on leisure cus­tomers, who can be eas­ily tempted away by com­peti­tors. So LHLCCs are tack­ling this by of­fer­ing more lu­cra­tive pre­mium seats with ad­di­tional space, meals and added frills (Air Bel­gium’s up­com­ing Hong Kong–Brussels route is a case in point).

NEW STRATE­GIES

The sea­son­al­ity of pas­sen­ger traf­fic is an­other chal­lenge. In many mar­kets, not even low fares will fill the air­craft on a year-round ba­sis, re­sult­ing in the need to find other counter-sea­sonal mar­kets. Full-ser­vice net­work car­ri­ers get over this by feed­ing high vol­umes of short-haul traf­fic onto their long-haul flights at their hubs. LHLCCs need their own feed. Around half of AirAsia X’s pas­sen­gers con­nect from AirAsia short-haul flights. Out­side of Scan­di­navia, where Nor­we­gian has the den­sity of short-haul sched­ules to do the same thing, it needs to find other so­lu­tions. Ryanair would have made a good part­ner, but the two air­lines have fallen out, so no deal there.

If this wasn’t enough of a chal­lenge, there’s been a re­sponse from long-haul net­work car­ri­ers. When short-haul LCCs be­gan to grow, ex­ist­ing air­lines didn’t take the model se­ri­ously un­til it was too late. Lessons have been learned, and that mis­take won’t be re­peated. Lufthansa has now set up a long­haul arm of its LCC Eurow­ings, and Air France-KLM is dab­bling with Joon, though ex­actly what these “new” air­lines will achieve isn’t clear. Joon is ev­i­dently lower cost (than Air France), but not truly low cost, and is pitched at mil­len­ni­als; but some French mil­len­ni­als I spoke to re­cently said they didn’t un­der­stand what the air­line was about.

IAG, on the other hand, has a mul­ti­fac­eted re­sponse to the LHLCC phe­nom­e­non and is join­ing the party in earnest by us­ing sev­eral of the air­lines in its port­fo­lio. Aer Lin­gus, a lean, mean fight­ing ma­chine, is ex­pand­ing its North At­lantic ac­tiv­ity out of the Repub­lic of Ire­land with plenty of feed po­ten­tial to and from the UK and Europe. It has also in­tro­duced cheaper econ­omy fares with fewer frills – and it has scored where Nor­we­gian failed, by reach­ing a feeder deal with Ryanair that will come into place later this year. This deal will boost its abil­ity to fill seats on its long-haul flights. Bri­tish Air­ways is also in­tro­duc­ing no-frills econ­omy fares, bring­ing den­si­fied Boe­ing 777s with 10-abreast econ­omy seats to Lon­don Gatwick, but also in­clud­ing more higher-profit pre­mium econ­omy seats. This will al­low BA to de­liver lower unit costs than Nor­we­gian can on its B787s. IAG has also es­tab­lished its own LHLCC air­line, Level, which has started ser­vices to North and South Amer­ica from Barcelona and be­gins op­er­a­tions from Paris Orly in sum­mer. Level can ob­tain feed from IAG sta­ble­mate Vuel­ing at both air­ports and uses Air­bus A330 air­craft that con­sume more fuel, but are cheaper to buy or lease.

It’s go­ing to be in­ter­est­ing to see how this plays out in the years ahead. There are go­ing to be win­ners and losers, and we could see some big shocks, but it looks like the LHLCC model is here to stay.

When short-haul LCCs be­gan to grow, air­lines didn’t take the model se­ri­ously un­til it was too late

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