Low-cost long-haul, tidal wave or flash in the pan ?

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Low-cost long-haul companies continue to develop in Europe. However, nobody knows yet whether such a model has any future: is it really possible to significantly reduce costs compared to traditional players? Certainly not as much as in short-haul flights.

What will the future hold for low-cost long-haul travel? Will it revolutionize long-distance air transport as it has done for short and medium-haul flights, or is it destined to remain a niche activity or even disappear ? At the Paris Air Forum on June 16th it was one of the themes to be debated by Bjørn Kjos, CEO of Norwegian, Marc Rochet, President of Air Caraïbes and French Blue, and Laurent Magnin, CEO of XL Airways and La Compagnie.
This is the issue that now animates all players in the sector. Just a few years ago, the question did not arise.

Air Asia X and Norwegian, the two powerhouses

For nearly thirty years, the bankruptcies of all the daredevils who had experimented with low prices on long-haul flights (Skytrain, Zoom Airlines, Oasis...) along with the chaotic beginnings at the end of 2007 of AirAsia X, the long-haul subsidiary of the low-cost Malaysian airline, AirAsia, demonstrated to the experts the impossibility of setting up a low-cost model for long-haul flights. Ten years later, the same experts are now questioning their prognosis.

First in Asia and then in Europe, low-cost long-haul airlines have continued to develop in the wake of two medium-haul low-cost airlines that took up the gauntlet of long-haul flying: AirAsia X in Asia, and Norwegian in Europe. After a timid start, which was probably related to the impact of the financial crisis and the surge in oil prices beginning in 2008, these two precursors have begun to seriously ramp up their operations over the past two years. The former already operates 30 A330's and has 76 aircraft on order, whilst the second already operates about 15 Boeing 787's (with about 30 more on order in addition to 30 A321LR's).

These two companies have a significant lead over their competitors, all of which are subsidiaries of traditional companies. Even though the latter have responded quickly, they have not given the same means to their subsidiaries.

In Asia-Pacific, for example, the fleets of Jetstar and Scoot, subsidiaries of respectively Qantas, the Australian, and Singapore Airlines, are half the size of AirAsia X. Same as in Europe, where the long-haul fleet of Norwegian is equivalent to that of Eurowings (Lufthansa), French Blue (subsidiary of Air Caraïbes) and Level, the newest long-haul low-cost subsidiary of IAG, the parent company of British Airways, Iberia and Vueling.

The difference in pace between companies originating from low-cost airlines and those set up by conventional airlines reflects a divergence of approach.

The former (AirAsia X, Norwegian) dream to duplicate on the long-haul the same success they encountered with the medium-haul, and expand faster.

The second, created in reaction to the arrival of the former, have a more defensive approach. Their development is weakened by contradictory objectives.

They must allow their parent company to resist, if the low-cost long-haul adventure takes off, whilst being careful not to cannibalize the long-haul business of their owners. Even if it is not intended and equipped to fight against low-cost airlines, Air France's project to create Boost nevertheless reflects this reality.

In Europe, other models are emerging, such as that of the Icelandic low-cost Wow Air, which provides cheap flights between Europe and the United States via a stopover in Reykjavik. Finally, the company XL Airways, with a model of mono-class aircraft, has also embarked on low-cost long-haul.

How to reduces costs?

Although projects are developing, no one really knows yet whether such a model has any future. Is it really possible to significantly reduce costs compared to traditional players in such a way as to reshuffle the deck for long-haul travel? The subject is still being debated. But obviously the gap of over 50% in short-haul competitiveness between low-cost and conventional airlines that was discerned over 15 years ago (and which still remains with certain traditional airlines)  is impossible to duplicate for long-haul travel. Not only because traditional companies have restructured themselves  since then, but also because the potential for cost reduction is smaller for long-haul flights.

It is indeed difficult to gain much in aircraft productivity for example, since that of the traditional companies is already reasonable. Although by committing very early to the B787, Norwegian obtained excellent prices, it is also very difficult, given the enormous order backlogs of aircraft manufacturers, to negotiate an exceptional discount for new long-haul aircraft in the same way that Ryanair and Easyjet did in the early 2000's for single-aisle B737 or A320 aircraft.

New aircraft

Nevertheless, there are and there will be other opportunities to make "good moves". Notably with the arrival on the second-hand market of a number of aircraft that will have to be sold off cheaply in order to find buyers. Above all, the arrival of medium-capacity, single-aisle, long-haul aircraft such as the A321LR (200-250 seats), and in the next decade a new "Middle of the Market" Boeing aircraft, will bring new possibilities.

Less expensive to purchase than widebody aircraft (even if their cost per seat is higher), these aircraft have a smaller capacity, which makes them less dependent on a hub system that is needed to fill large aircraft. But, apart from issues concerning the fleet of aircraft, all these low-cost long-haul companies have, now and in the future, the advantage of their youth. Starting from a blank sheet, their structural and operational costs will certainly be lower than those of traditional companies.

"Blank sheet"

The creation of a new company also makes it possible to establish a difference with the traditional companies in terms of employee costs. Here too, starting  with a blank sheet, they are able to begin with young, lower-paid staff, and also with rules of operation and remuneration that from the very beginning combine high productivity with hourly wages that lie towards the bottom of the scale.
For Marc Rochet, president of French Blue, if they want to make a breakthrough "the low-cost long-haul carriers must offer unit costs that are 25 % lower than those of conventional airlines".

Even though the factors for cost reduction compared to the traditional companies exist, the challenge looks much less easy than for the medium-haul. The firepower of the Gulf companies that lies between Europe and Asia complicates the initiatives between the Old Continent and Asia. And everywhere else, low-cost operators will be faced with global alliances between the majors, powerful attractions to the business travellers who are needed to subsidize low-cost.

What will Ryanair, Esayjet, Southwest and others do?

Even though some experts consider that low-cost long-haul air travel is set for a breakthrough, the speed of its growth and the size that it could reach will have difficulties in matching those seen for medium-haul flights. The scale of development may actually depend on the evolution of the behaviour of the current low-cost giants, such as Ryanair, Southwest, JetBlue or Easyjet, and their ability (or not) to find ways of moving into the long-haul segment. For, with the strength of their brand, their financial resources, and their strong positions at some major airports which would enable them to feed long-haul flights, they would have the opportunity to strike hard. Of course, although they are focused today on the conquest of new market shares in the short and medium-haul markets, they will eventually need to find new levers for growth.


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