July 5, 2019

Is long-haul, low-cost the future of flying?

This blog post was drafted in collaboration with John Strickland, Director at JLS Consulting. You can find him on Twitter @JohnLStrickland.

Today, low-cost airlines cover an impressive 32% of the global market – up from 25% just a decade ago. Low-cost carriers (LCC) now account for more than 40% of all seats in Europe, and 36% of seats in Latin America[1].

At the same time, we’re seeing some key players in the airline ecosystem – such as Norwegian – disrupting the long-haul market by extending the LCC business model to offer cheaper tickets on increasingly longer routes. This raises the question: is this emerging segment of the industry going to be decisive in securing the future of airlines?

Democratising air travel

Air travel has not always been this widely accessible. Back in the 1950s (often hailed as the ‘golden age’ of flying), it was the preserve of the wealthy, successful, and glamourous. The airline industry was subject to governments’ rules and playbooks. Flagship carriers were the only ones to be able to operate. Deregulation, which came in the 1970s in the USA and in 1992 in the EU (with the introduction of the Internal Market for Aviation), opened the doors to more competition in the market and played a crucial role in driving down prices.

LCCs are able to offer those lower airfares by reducing or eliminating costs. This business model typically restricts the airline to flying short haul only, as this allows aircraft and crew to return to their own hubs overnight to avoid hotel costs, crew expenses and other operational complexities. What’s more, single-aisle aircraft are typically used on short haul low-cost routes, as they offer greater operational flexibility. These aircraft can be turned around quicker than larger models, thereby minimising costly and unproductive time on the ground. Flying to secondary airports has also been a key strategic decision that has previously allowed some LCCs to avoid high landing fees at bigger airports.

However, major technological advances in the airline industry since the advent of LCCs could be about to revolutionise this approach, including improvements in aircraft engine design, increased fuel efficiency (e.g. with the B787 Dreamliner or the A350), and the rise of more cost-effective distribution channels.

The dawn of long-haul, low-cost

In recent years, airlines have tried a lot harder to diversify to guarantee revenue streams. As a result, the sector has seen a shift in business models, most notably with an increased focus on long-haul, low-cost opportunities. Some airlines have invested in widebody aircraft, and many have now opted for major airports in a move to attract more customers. This dive into unchartered waters has come with a huge price tag for some airlines – including Primera and Wow Air, which ceased operations in 2018 and 2019 respectively. Other carriers, such as Norwegian or Lufthansa Group subsidiary Eurowings, have proven hugely popular amongst customers but are still grappling with big losses and introducing new measures to further reduce costs and even cutting routes. Indeed, Lufthansa has just recently announced that Eurowings will cease to operate long haul services entirely to focus purely on short haul.

So why exactly is the long-haul low-cost strategy proving so tricky for airlines to adopt successfully?

The many challenges of long-haul, low-cost

The airline industry is infamously low-margin, so operating on a lowest-price model means even a small change in expenses (such as a rise in fuel prices) can have disastrous financial consequences. When transposed to long-haul routes, additional factors come into play, causing airline strategists headaches:

  • Using low fares to attract traffic has increased reliance on price-conscious (often millennial) leisure audiences, which have less loyalty to the airline and can easily be tempted away by a cheaper competitor.

  • Scrapping business class seats to increase the number of economy spaces has allowed airlines to spread operational costs across more passengers, but has meant sacrificing premium traffic.

  • Seasonality adds another layer of complexity to the equation. Can long-haul, low-cost carriers tap into new markets out-of-season? Can they successfully partner with LCCs to feed traffic to long-haul routes?

Whilst there is no doubt long-haul, low-cost carriers have won over customers, airlines are learning that the low-cost model used on short-haul flights can’t simply be copy-and-pasted across to the more operationally complex long-haul ecosystem. Most will agree LCCs have managed to build a successful business model short-haul, but ultimately, can they crack the code to make it in the long-haul segment? We’re likely to find out in the next few years.

[1] https://centreforaviation.com/analysis/reports/lccs-increasingly-attracted-to-primary-airports-459531