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Going the distance

Published: 30/09/2007 - Filed under: Archive » 2007 » October 2007 » Special Reports » Features » Special Reports »

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The no-frills revolution has changed the way we fly around Europe forever, and now the seeds of change are being planted in the long-haul sector. A number of start-up ventures, like Zoom Airlines and Oasis Hong Kong have already emerged, but anyone waiting for their first 99p flight to New York or the Far East might find themselves disappointed.

The simple reason is that no-frills long-haul is not as easy as short-haul. Would-be entrepreneurs have bombarded airline bosses with plans for new ventures, but, as any chief executive will tell you, the business model used by airlines like Easyjet does not readily translate for journeys of more than three or four hours.

Typically, Easyjet’s aircraft will fly three return journeys a day, with six different sets of passengers to sell expensive food and drink and tax-free goods to, helping to bring down ticket prices. Easyjet never needs to put its crews up in hotels and does not need to worry too much about high fuel prices, as its flights are relatively short. It can also turn its aircraft around in 25 minutes, partly because it does not have to wait for connecting passengers as it does not sell through-tickets.

None of this applies in long-haul. Flight durations mean crews are scattered around the world in expensive hotels with compulsory rest periods and that fuel costs have a big impact on ticket prices. A Boeing 747 usually needs at least two hours of preparation after landing before it can fly again. Then there is the issue with time zones, as some routes compel airlines to keep aircraft on the ground for long periods to offer good arrival and departure times.

Those who are trying to offer budget long-haul also have another big factor to contend with – the fact that, technically, we have already got it. Carriers will quietly confess that at certain times of the year, particularly across the Atlantic, they sell large numbers of tickets at or below cost.

Airline chiefs will tell you that no business model exists that can offer fares to the US below a cost price of about £230-£240, and that this price is dependent on having a premium cabin of sorts to subsidise the cheap seats. This level of fare is often in the market, but British Airways and others will sometimes advertise a £199 Heathrow-JFK return promotional fare, with limited availability, probably selling at a small loss at the time of weakest demand.

Opening up the market

But if the bad news is that you’ve already had it so good, the good news is that there’s going to be more of it, especially across the Atlantic. From the end of next March, an archaic agreement between the UK and US, known as Bermuda II expires. Bermuda II bars all but two UK carriers, BA and Virgin Atlantic, and two US ones, American Airlines and United Airlines, from operating from Heathrow to the US. (Kuwait Airways and Air India are allowed to take passengers from Heathrow to New York as part of their longer journeys, similarly Air New Zealand can offer you San Francisco and Los Angeles, but these add little to the overall capacity.)

By next spring, though, the skies – and Heathrow – will be open, and Continental, Delta and US Airways will move some of their Gatwick services to more popular Heathrow for the first time. This may not drive economy fares much lower, but there will be more cheap fares more often and premium class tariffs will take a battering at Heathrow. At the same time, the US carriers will upgrade their business cabins. Delta will offer a fully-flat bed product and American Airlines will offer an angled lie-flat bed. More choice at the top end at Heathrow will mean BA and Virgin can no longer charge premiums to business travellers.

The major airlines’ obsession with Heathrow and the fact that, at some times of the year, they are selling at a loss, has meant that few have seen the need to fly from other London airports. From October though, American Airlines will begin flying Stansted-JFK. Its lead-in fare, £232, is the same as for Heathrow – showing how competitive things already are at the main London hub.

A new model

Cut-throat pricing has meant that, historically, it would be foolish to enter the market against established carriers, as Freddie Laker found out. Some, though, are trying, using bits of the no-frills approach. Zoom Airlines’ arrival in June came 10 months ahead of the Open Skies deal between Europe and the US. It offers Gatwick-JFK, with two flights a week going via Bermuda. The latter was a destination on which, until Zoom arrived, BA enjoyed a monopoly. Zoom says that a quarter of its 182 economy seats are available at its cheapest fare on “most” flights, although advertising rules mean that it can drop this to 10 per cent during the summer peak. Nevertheless, none of the established airlines will match Zoom’s £258 summer lead-in fare in any great quantity. This autumn, Zoom has already put down the marker, offering seats from £199 return on most dates until mid-December.

For Zoom’s managing director, Jonathan Hinkles, Open Skies was not the catalyst, as some slack was already allowed outside Heathrow. “We could have done six or seven flights a week under Bermuda II,” he said. “Now with Open Skies, that limit is blown out of the water.”

If the old restrictive agreement explains in part why has no one done this before, the wider reason is perhaps simply that there was no need to, as in the five or so years after 9/11 bankrupt US carriers slashed rates to fill seats no one wanted.

Chasing the dream

So, who else might join the transatlantic free-for-all? Carriers with suitable craft – typically, well-worn Boeing 767s – have until now been charter airlines, which are only now beginning to change their business models. They were busy serving their tour operator brands, but now consumers are happy booking over the web and travelling independently, they are having to rethink.

In a few years’ time, there may be a rash of scheduled route launches by charter carriers. Monarch, which has served holiday destinations for over 40 years, is getting a fleet of six Boeing’s new 787 Dreamliners in 2010. These wide-bodied, new generation aircraft are 20 per cent cheaper to run than comparable types. The airline’s managing director, Tim Jeans, an ex-Ryanair executive, says they “won’t just be operating charters”. He is also looking across the Atlantic. “We will most probably enter these markets on a scheduled basis,” he said, adding that sales will be online, with fares among the “most competitive” in the market. Jeans said he was surprised at the lack of an Atlantic “gold rush” this year.

The 787 will catch many traditional airlines out. Jeans reckons that its economics will allow him to offer an economy seat pitch of 33 inches – two inches more than BA. The new aircraft has been such a success that order books are full until 2014, giving a headstart to Jeans and companies like Thomsonfly, which has also bought it. Others will have to make do with elderly fleets and the potential problems they bring.

Jeans believes a lack of aircraft availability might scupper plans by Ryanair’s Michael O’Leary to start a no-frills transatlantic venture when he retires in a few years. Even O’Leary, the high priest of all that is cheap and (mostly) cheerful, says his project will not work without a premium cabin to subsidise the cheap seats. Jeans agrees: “Low-cost long-haul is coming, but it is very difficult to see it working without a premium product. Ours will have one from day one.”

Flyglobespan, the Edinburgh-based no-frills carrier started by a tour operator, also chose this year to move from flying to Florida to offering Liverpool to JFK and Glasgow to Boston. It was the first to offer regional no-frills long-haul, as its basic economy offering includes only a light snack and paid-for in-flight entertainment. Its pitfall is that many of its US flights touch down in Knock, Ireland.

Business before pleasure

Others have copied the no-frills airlines’ low cost base to attract a different class, with all-premium flights. Eos, Maxjet and Silverjet used factors like older aircraft and secondary airports to allow them to offer fares as low as a quarter of other airlines’ premium tariffs. Silverjet founder Lawrence Hunt explained: “It costs £65,000 return to fly a 767 to New York. With a 65 per cent load factor at £999, we break even. On 80 per cent, we average £5.2 million operating profit on a US$20 million asset.”

Eos and Maxjet have been around for two years and are building fleets and routes, but Silverjet this summer underlined how fragile these ventures can be. It began flights in March with a single aircraft, and was due to go double daily from Luton to Newark from July when it received its second. This, though, had to be shelved until September after a serious fault was found with its original 767.

Over in Hong Kong, the other new contender, Oasis, uses the same formula as Zoom. Its small route network, though, is hampering its ability to control costs. Its flight from Hong Kong arrives at Gatwick in the early morning, but the aircraft remains grounded for 14 hours to offer an overnight return that evening – hardly an intensive use of an expensive 747. Despite this its cheapest fare, around £265, is about £100 less than airlines serving Heathrow.

The UK has pioneered budget flying but, as with so many things, it is Asia that will probably take the original idea and do it much cheaper. Oasis, funded by a Hong Kong property magnate and pastor, has a way to go before it gets there, but another new contender, Malaysia’s Air Asia, might show it how it’s done.

Its offshoot, Air AsiaX, launched 12 months ago. This summer, Sir Richard Branson saw its potential and bought a 20 per cent stake. Next autumn, it takes delivery of the first of 10 Airbus A330 twinjets. It will cram 396 seats on them, about 100 more than full-service airlines, but again, the economy seat pitch, 31 inches, is the same as Virgin’s and 28 of these seats will be premium class. The Kuala Lumpur-based airline will most likely serve Stansted, but its sponsorship of Manchester United may hint at bringing budget long-haul to the north-west.

So are these airlines for you? Yes, if you don’t mind queues at the airport and, in some cases, paying for drinks, extra food and in-flight entertainment, plus the absence of easy connections, through-checked baggage and those frequent flyer points. There is also usually no back-up aircraft in cases of technical delays. On the other hand, if you don’t want any of the above hassles, or if someone else is paying, those frills can be very important…

Low Cost

• look for 50-day advance purchase fares or, if you can take a chance, wait until three weeks before departure when unsold seats are released.

• Buy a package. Generally, package flights are a quarter of the price as they don’t carry the Saturday-night penalty – and you don’t have to use the cheap hotel that comes with it.

• Don’t assume that the traditional airlines will be more expensive – competition is cut-throat and will get more intense next year.

• Consider going via another European hub like Frankfurt, Amsterdam or Paris. Getting a connection from your local airport is easier than getting to Heathrow and usually cheaper. Similarly, travel via a US hub – going to New York via Toronto can save up to 75 per cent.

• Use a good agent or fare comparison site. An experienced agent will know some of the less familiar routings, for example Manchester-JFK with Pakistan International Airlines.

• When booking more than one seat online make separate bookings. Otherwise the system automatically will default to the higher price for both if there is only one spare seat left in the cheaper fare category.

COMMENTS » 

JJ51435 - 17/11/2007 18:15

Very good article, especially the part how it does not make sense to fly long haul in low cost. I would add the cost of landing fees at major airports and the fact that some secondary airports are remote and closed at night.

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