A gathering storm
During the last decade, Michael O’Leary, the charismatic CEO of Ryanair, an airline that has become synonymous with the term “low-cost”, was regularly reminding everyone about the Napoleonic plans to bridge the New and the Old worlds with affordable flights. Come 2017, and the idea has been scrapped, perhaps forever, while others have chosen to pursue the dream.
“Basically, a long-haul LCC is nothing new,” Tobias Rueckerl, aviation analyst at Adavco, reminds us. “Every holiday airline did this since decades in the past because tour operators demanded lowest prices for their far away destinations like the Dominican Republic and Thailand”.
Indeed, summer is just a whim away and experience-hungry travelers have not one but several budget carriers to choose from. Spring break in Europe or a cross-USA road trip is an easier dream to achieve with ticket prices starting in the double digits. Or, in aviation terms, the increasing number of long-haul LCCs is poised to stimulate base demand. It can also potentially shift some demand from full-service carriers, if they do not respond competitively.
“There are several things that help LCCs offer low prices – high utilization of aircraft, economically advantaged crew bases, and the disaggregation of the product, meaning that customers choose the add-ons they need like checked bags and assigned seats,” is how Mark Drusch, an aviation expert at ICF, breaks down the feasibility of the low-cost approach.
Can’t beat them? Join them!
“The fares Norwegian has launched are clearly just designed to get some headline media coverage,” is how Willie Walsh, the CEO if IAG – a conglomerate ruling over British Airways and Iberia – commented on Norwegian’s announcement of $69 tickets in February. In a way, it’s hard to disagree with him, as the number of cheaper-than-chips tickets is limited, and it only buys you the seat. Baggage, snacks, reservations and more ‘luxurious’ (hey, we are talking about budget airlines) items like earphones and comforters all have separate price tags on them.
Ironic as it may be, one month later it is IAG’s latest offspring LEVEL – set to connect Barcelona with US and Argentina this summer – that’s dominating the headlines. The latest addition to the trans-Atlantic LCC family, IAG will start flying two new 314-seat Airbus A330 aircraft from Barcelona to Los Angeles, San Francisco, Buenos Aires and Punta Cana. IAG’s Vueling will be providing access to its extensive European network, serving as a feeder airline.
While the prices on the newly announced routes are low and start at $145 per ticket, they are not as shocking as those of competitors from up north. Will the carrier create a level playing field, as the name hints? Or will LEVEL have a bumpy start, oftentimes synonymous with the efforts of legacy carriers to enter the budget segment? Summer of 2017 is where the answer lies.
The airline that started it all
In face of the growing competition (looking at you, LEVEL!) Norwegian might have an upper-hand in the race. With six shiny Boeing 737 Max planes arriving by the end of the year, the airline looks at substantial cost savings that will help to keep the fares (let’s be honest, a part of fares) below the one hundred dollar mark. Couple that with advanced scheduling schemes involving back-to-back flights across the pond and to South East Asia that keep the aircraft flying for up to 18 hours, and you have all the ingredients for a successful long-haul LCC. Surely, the success part can (and is – by no other than IAG) be contested, as the profits recorded in 2016, best so far, are only $136 million.
Same routes, new rules
The long-haul LCC model is here to stay for the foreseeable future and we can expect it to expand into new geographies and current markets. As Ryanair’s example – being the largest European airline and all that – shows, the model is successful where the opportunity to stimulate demand in large populations exists.
Budget carriers established themselves very quickly in short-haul markets. Their success was conditioned by the usage less congested airports, quicker turnarounds, higher aircraft utilization, reducing “frills” such as catering to simplify the product and “unbundled” fares where the passenger pays for extras such as checked bags.
“Following the success of LCCs in short-haul markets, long-haul always seemed a natural progression,” says Laurence Heath, an aviation expert at Falcon Consultancy.
“The challenge, of course, will be greater, primarily because scheduling options will make it extremely difficult to improve on the aircraft utilization rates of the legacy airlines. Meanwhile, the legacy airline business model has the advantage of several revenue streams, including premium class, connecting passengers and cargo, in addition to the main point-to-point economy product.”
One final thing to mention at this point is the “middle ground”, both legacy carriers and budget airlines seem to meet in. And if in the early days, LCCs were mostly serving leisure travelers, now they take a chunk of the business traffic as well, which brings the services of legacy carriers and LCCs closer together.
“Responding to the increased competition, legacy carriers lowered fares on the back of cost savings and product rationalization, for example it is now the exception if meals are served on short flights, whereas once this was considered to be a competitive necessity”, says Mark Drusch from ICF.
While LCCs are up-selling everything from seat selection options to extra carry-on, legacy carriers are cutting many amenities and increasing seat density. At the same time, many well-established airlines are sprouting LCC clones of their own and using them on long-haul routes as well, Air Canada Rouge and Eurowings (Lufthansa’s spin-off) being the most prominent examples.
Emirates President Tim Clark calls the rise of the low-cost long-haul carriers a “gathering storm” that will increase the number of travelers taking long-distance routes in the future. Clark has also recently mentioned a paper he did on long-haul LCCs in the 90 and the many laughs he received about the idea. Looking at today, his predictions seem on point, with big players already taking notice of the new trans-Atlantic current.
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