Article from BTNews 25 MAY 2015
COMMENT: Long Haul Low-Cost
LeighFisher, the global management consulting firm, has produced a fascinating study on the viability of long haul low-cost (LCC) air carrier services.
There are now more than 100 LCCs operating throughout the world, including 45 in Asia and Oceania, 35 in Europe, and 11 in North America. However there are only three true long haul exponents, AirAsia X, Jetstar and Norwegian.
AirAsia X has bloodied its nose in Europe but says it will come back, and Norwegian has yet to prove that Gatwick to North America works. However it never goes head to head, New York and Los Angeles served by others from Heathrow, and it shied away from Miami by going to Ft Lauderdale.
We paraphrase a ‘Focus’ article which Michael O’Leary might take a look at.
In the 1960s and 1970s, Loftleidir, known internationally as Icelandic Airlines, pioneered an LCC business strategy on flights between Europe and New York JFK (then known as Idlewild). Because Icelandic Airlines had not joined the International Air Transport Association (IATA), which then defined the fares for member airlines on transatlantic routes, it could offer considerably lower ticket prices.
In 1973, in response to increasing competition and the economic impact of the 1970s energy crisis, Icelandic Airlines merged with Air Iceland to form Icelandair.
In 1977, Laker Airways launched “Skytrain,” its long haul LCC service between Gatwick and JFK. Although Skytrain was successful in its first years, Laker Airways declared bankruptcy in 1982 after rapid expansion and acquisition of a new aircraft fleet overextended the airline’s finances. British Airways also put its knife in with predatory pricing.
Other LCCs – People Express in the 1980s and Oasis Hong Kong Airlines in the 21st century – also experimented with long haul service and declared bankruptcy.
Today, LCCs again are testing the viability of long haul service; they include AirAsia X, Jetstar Airways, and Norwegian. In addition, network airlines are establishing new low-cost subsidiaries such as Singapore Airlines’ “Scoot,” Air Canada’s “Rouge” and Lufthansa’s proposed “Jump”. Air travel has changed since Icelandic Airlines’ transatlantic flights in the 1960s and 1970s and Skytrain’s inaugural flight in 1977.
Since 2000, the number of scheduled seats on the world’s LCCs has tripled, increasing an average of nearly 9% per year between 2000 and 2014. In the United States, the number of LCC seats increased an average of 2% per year during that period, reflecting the maturity of the US LCC market. In contrast, LCC services in Europe and Asia averaged increases of 15% and 17% per year, respectively. The LCC business model was built on a foundation of short haul markets which provides cost advantages such as short turnaround times and high utilization of crew and aircraft, service to secondary airports with lower costs than primary airports, and limited in-flight food and entertainment.
With decades of short haul experience, LCCs are diversifying their networks by serving selected long haul markets. Although long haul routes (3,000 nautical miles or more) account for a small share of LCC seats (1% in 2014), the number of LCC seats on long haul flights doubled between 2000 and 2014, increasing an average of nearly 6% per year. The cost advantages that LCCs realize on short haul routes are difficult to achieve on long haul flights. Operational and cost advantages derive from the quick turnaround times typical of short haul LCC routes, but longer ground times are needed for aircraft servicing and refuelling.
On long haul routes, time zone changes, lengthier flight durations, and night time flight curfews at airports limit the number of daily aircraft rotations and the utilization of crew, reducing cost efficiencies. For example, during its first two years of operation in 2005 and 2006, Oasis Hong Kong Airlines operated Boeing 747-400 aircraft on routes and load factors averaged 85%. But in response to increasing competition on the Hong Kong – London route and a customer preference for Heathrow over Gatwick, Oasis offered airfares that did not meet its costs. As a result, Oasis suffered heavy losses and ceased operations in early 2008.
Norwegian faces no competition on 10 of its 16 long haul routes from bases in Copenhagen, Oslo and Stockholm.
AirAsia X and Jetstar Airways represent a new breed of LCCs that are subsidiaries of parent airlines. AirAsia X operates only widebody aircraft on long haul flights, particularly to large markets, while Jetstar flies both narrow-body (Airbus 320) and widebody aircraft. AirAsia X competes on four of its five long haul routes, but benefits from the short and medium haul feed provided by its parent, AirAsia. Because operations of LCC subsidiaries such as AirAsia X and Jetstar are reported with the parent company’s financial statements, it is difficult to evaluate the profitability of their long haul low-cost routes.
LCCs are following the example of network airlines in pricing their long haul product. Norwegian uses a two-class configuration on its 291-seat Boeing 787-8 aircraft (32 Premium, 259 Economy), compared with United Airlines’ three-class configuration on its 219-seat Boeing 787-8s (36 First/Business, 70 Economy Plus, 113 Economy). Offering premium seats gives LCCs enhanced revenue potential that could help ensure the viability of long haul routes.
Have All Lessons Been Learned?
New fuel-efficient aircraft, access to existing carrier networks for connecting flights, and routes linking major cities in the world’s fastest-growing economies are three new ingredients that now might make long haul low-cost service viable. The management strategies and technology available to airlines today have improved greatly since the demise of Laker Airways in 1982.
Does Michael O’Leary still aspire to turn Aer Lingus into a true long haul LCC? The LeighFisher “Focus” piece will give him food for thought.
www.leighfisher.com/discover-whats-new/publications/focus-viability-long-haul-low-cost-carrier-service
OUR READERS' FINEST WORDS (All times and dates are GMT)
All comments are filtered to exclude any excesses but the Editor does not have to agree with what is being said. 100 words maximum
John Jones, Reigate UK
Skytrain was eventually licensed by the UK government after the House of Lords found that Peter Shore had gone beyond his powers in cancelling the designation. However in order to protect incumbent carriers it was approved for Bo707 operations from Stansted to Newark with half the seats roped off. It took a further three years to gain US approval during which the conditions were modified by the UK to allow LGW departures and DC10 capacity and that was the service introduced in September 1977.
Peter North, UK
I believe that Laker began his Skytrain operation from Stansted rather that Gatwick but was able to switch the service to LGW after persuading the government of the day that the Stansted services were not sustainable in the long term. Does anyone else have a memory of this?