BAT­TLE FOR THE AT­LANTIC

Low-cost car­ri­ers are pro­vid­ing se­ri­ous com­pe­ti­tion to tra­di­tional air­lines in the all-im­por­tant transat­lantic mar­ket, re­ports Alex McWhirter

Business Traveller (Middle East) - - Contents -

LCCs are rais­ing the stakes on ul­tra­com­pet­i­tive transat­lantic routes and more main­stream car­ri­ers are eye­ing hand bag­gage only fares, re­ports Alex McWhirter

As I write these words in late Septem­ber, in­vest­ment bank Mor­gan Stan­ley has down­graded Bri­tish Air­ways owner IAG. Why? Be­cause the out­look for tra­di­tional air­lines ply­ing the At­lantic has sel­dom been gloomier.

Back in 1977, Sir Fred­die Laker’s Skytrain broke the transat­lantic car­tel of Bri­tish Air­ways, Pan Am and TWA by ush­er­ing in a low-fares rev­o­lu­tion. Oneway tick­ets from Lon­don Gatwick to New York JFK with Skytrain cost £59 on a first come, first served ba­sis. At the time, I re­mem­ber peo­ple from the re­gions trav­el­ling to Lon­don on overnight trains and buses so they could ob­tain a good place in the queue at Vic­to­ria sta­tion.

Laker was fol­lowed a few years later by US low­cost car­rier Peo­ple Ex­press – I re­mem­ber buy­ing a Gatwick-New York Ne­wark flight (with con­firmed seats) in Septem­ber 2004 for about £130 re­turn. Bear in mind that taxes, fees and charges in those days were just a few dol­lars.

Back then, it was thought that low transat­lantic fares were here to stay. But we were wrong. Skytrain and Peo­ple Ex­press messed up their sums. Both failed for a va­ri­ety of rea­sons, one of which in­cluded preda­tory pric­ing by ri­vals. For decades there­after, cheap fares were only avail­able if you trav­elled out of sea­son and met re­stric­tions. Those fairly flex­i­ble Skytrain/Peo­ple Ex­press fares never re­turned.

Some 30-plus years later, it’s all change. The en­vi­ron­ment for bud­get air­lines is be­nign. Low fuel prices, lib­eral avi­a­tion treaties and the ad­vent of smaller, more eco­nom­i­cal air­craft mean the low-cost car­ri­ers (LCCs) and other bud­get op­er­a­tors have re­turned in a big way.

Quoted on proac­tivein­vestors.co.uk, Mor­gan Stan­ley says: “A new gen­er­a­tion of car­ri­ers is tak­ing on the legacy [tra­di­tional] groups with a fresh twist on the low-cost, long-haul model. The rise of Nor­we­gian, as well as the likes of Wow Air and West­jet, has forced the hand of the legacy car­ri­ers on both sides of the At­lantic into adapt­ing their own busi­ness model to suit this new re­al­ity.”

Ac­cord­ing to Mor­gan Stan­ley, the fi­nal quar­ter of this year points to a 30 per cent year-on-year ca­pac­ity in­crease across the At­lantic, which for most

Hand bag­gage-only fares are com­mon­place within Europe but are now be­ing ex­tended to long­haul routes

The Ice­landic car­ri­ers cap­i­talise on their coun­try’s ge­o­graph­i­cal lo­ca­tion to pro­vide dozens of links be­tween Europe and the US

air­lines is their most prof­itable area of op­er­a­tion. BA is par­tic­u­larly ex­posed as transat­lantic is its most prof­itable area of operations, gen­er­at­ing a large share of its rev­enue.

ECONOMIES OF SCALE

It is the new gen­er­a­tion of nar­row-body air­craft ca­pa­ble of fly­ing long-haul – the B737 MAX 8 and the forth­com­ing A321LR neo – that are pro­vid­ing LCCs with cost ad­van­tages. So how are their ri­vals re­spond­ing? Rightly or wrongly, they are an­swer­ing the challenge by down­grad­ing econ­omy class stan­dards in a bid to match the LCCs.

Septem­ber saw a fur­ther econ­omy class down­grade. IAG’s Aer Lin­gus fol­lowed in the foot­steps of TAP Por­tu­gal in launch­ing a ba­sic “Saver” hand bag­gage-only fare with the elim­i­na­tion of some frills. On­board cater­ing, for now at least, is still pro­vided. (Nor­mal “Smart” econ­omy fares re­main on sale but at a slightly higher price.) Such hand bag­gage-only fares are com­mon­place within Europe but are now be­ing ex­tended in other mar­kets.

Amer­i­can Air­lines, the joint ven­ture part­ner of Bri­tish Air­ways, is likely to fol­low. In a se­ries of me­dia in­ter­views in Au­gust, Don Casey, AA’s se­nior vi­cepres­i­dent of rev­enue man­age­ment, in­di­cated that the air­line was se­ri­ously con­sid­er­ing in­tro­duc­ing these ba­sic econ­omy fares. They could be ap­plied as early as next year, Casey in­di­cated. If that is the case, then, as we have seen with hand bag­gage tar­iffs within Europe, we can ex­pect oth­ers to fol­low.

In­deed, Eti­had Air­ways is tri­alling a new hand bag­gage only ‘Deal Fare’ on two key routes this win­ter, for book­ings un­til De­cem­ber 18, al­low­ing trav­ellers to pur­chase lower fares in econ­omy class if no checked bag­gage is re­quired. The trial fare, com­pris­ing a carry-on bag­gage al­lowance of 7kg, is avail­able on flights be­tween Abu Dhabi, Bahrain and Kuwait for travel un­til March 31.

Eti­had Air­ways Ex­ec­u­tive Vice Pres­i­dent – Com­mer­cial, Mo­ham­mad Al Bu­looki, said: “Pas­sen­ger feed­back and travel habits show that many of Eti­had Air­ways’ cus­tomers, es­pe­cially those trav­el­ling for busi­ness, week­end get­aways or day trips, don’t re­quire checked bag­gage, so we are test­ing a new lower fare on these key routes. As well as a great propo­si­tion for cus­tomers, this trial is an ef­fec­tive tool for gaug­ing cus­tomer re­ac­tion in the real world and test­ing the prod­uct’s vi­a­bil­ity for wider im­ple­men­ta­tion.”

Slightly lower hand bag­gage fares give air­lines a bet­ter dis­play in the all-im­por­tant book­ing sys­tems. This mat­ters a lot be­cause the air­line with the head­line price gets the busi­ness. What must worry the tra­di­tional car­ri­ers is that younger trav­ellers – the gen­er­a­tion that will fill air­line seats in the fu­ture – have warmed to LCCs and their no-frills poli­cies.

Younger trav­ellers tend to fly more than the older gen­er­a­tion and have read­ily adapted to hand bag­gage fares, even for long-haul. That is why, I be­lieve, tra­di­tional air­lines are copy­ing the LCCs rather than de­vis­ing some­thing dif­fer­ent.

WINDS OF CHANGE

Are the low-cost car­ri­ers threat­ened? It’s doubt­ful. Like Sixth Free­dom air­lines (which have the right to fly from a sec­ond coun­try to a third coun­try pro­vided they make a stop in their own coun­try), they are cre­ative and stay one step ahead of the game. They are adding ser­vices not only to main gate­ways but to se­condary or hin­ter­land cities, too.

These new departure and ar­rival points are on both sides of the At­lantic. So we see Nor­we­gian launch­ing B787 ser­vices to Seat­tle, Den­ver and Austin, and fly­ing transat­lantic from Edinburgh and Belfast with B737 MAX jets to smaller air­ports well-placed be­tween New York and Bos­ton.

The Ice­landic car­ri­ers cap­i­talise on their coun­try’s ge­o­graph­i­cal lo­ca­tion to pro­vide dozens of links be­tween Europe, the Nordic coun­tries and North Amer­ica. While flight times are length­ier (there’s a plane change in Reyk­javik), Ice­landair and Wow Air op­er­ate to and from many re­gional air­ports, mak­ing it con­ve­nient for lo­cals.

Over the past cou­ple of years, the rise of these air­lines has been an un­sung story. Ice­landair grew out of Loftlei­dir (which started transat­lantic ser­vice

in 1952) so it has stay­ing power. Al­though it has been around for decades, it is only in the past few years that its net­work has ex­panded to serve some 20 North Amer­i­can des­ti­na­tions from a wide range of cities on this side of the At­lantic.

Ice­landair will start to take de­liv­ery of B737 MAX 8 air­craft in Fe­bru­ary. Chief ex­ec­u­tive, Birkir Holm Gud­na­son, says: “The MAX will add flex­i­bil­ity in terms of adding ser­vice to new des­ti­na­tions, mak­ing it pos­si­ble to op­er­ate mar­kets all year round that we have not been able to do on larger air­craft. Cleve­land [start­ing next year] is a good ex­am­ple.” Last month, Ice­landair also an­nounced hand bag­gage-only fares.

With their pre­mium classes, both Nor­we­gian and Ice­landair are good op­tions for cost-con­scious busi­ness peo­ple. Nor­we­gian’s B787s are in a twoclass con­fig­u­ra­tion, al­though its B737 MAX 8s are one class. Ice­landair has con­ven­tional classes (econ­omy, Econ­omy Com­fort, Saga Class) on its B757s and this con­fig­u­ra­tion will be car­ried over to its B737 MAXs.

The bud­get air­lines are mak­ing all the run­ning. And as we have seen in Europe, the tra­di­tional car­ri­ers haven’t yet de­vised an ef­fec­tive re­sponse. What can go wrong? A hike in fuel prices, over­ca­pac­ity (too many seats chas­ing too few pas­sen­gers) and any fu­ture eco­nomic down­turns are is­sues that could up­set the ap­ple cart.

Con­sumers will be hop­ing that the op­er­at­ing en­vi­ron­ment re­mains be­nign.

Above: Vit­tala IAG’s Aer Lin­gus fol­lowed in the foot­steps of TAP Por­tu­gal in launch­ing a ba­sic “Saver” hand bag­gage-only fare with the elim­i­na­tion of some frills.

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