Are long-haul low-cost airlines here to stay, asks John Strickland.
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 reduces risk when testing new markets. Two companies are taking the lead: Airasia X operating out of Malaysia in the Asian markets, and Norwegian in European and translatlantic 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 inbuilt 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.
Seasonality 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, the Nordic-based airline 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 will not be repeated. Lufthansa has now set up a long -haul arm of its LCC Eurowings, and Air France KLM is dabbling with Joon, though exactly what the latter 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 multi-faceted 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’s to 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 the 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.
John Strickland is director of JLS Consulting