Low-cost Long-haul Can it work?

To operate profitably within Europe seems a distant hope for traditional network carriers. Lufthansa is currently rolling out a desperate attempt to lower its gigantic losses. That’s why it relaunched Germanwings as a low-cost carrier (LCC) on short-haul routes not operated from its Frankfurt or Munich hubs. Other network carriers like ,British Airways, Air France and Iberia have long withdrawn their core brands from most domestic and short-haul routes within Europe and instead focused on more lucrative long-haul flights from their big hub fortresses.

“It should be called ‘Heathrow Airways’ rather than British Airways,» said Lufthansa Chief Executive Officer Christoph Franz. But his airline could face a similar fate, ending up as ‘Frankfurt Airlines’, should the Germanwings project fail to achieve the desired profits.

But now the network carriers have to face a totally different threat to their business models. After conquering much of the short-haul market in Europe, North America and Asia, LCCs are once again trying to tackle long-haul routes. The new generation of extremely efficient aircraft such as the Boeing 787 and Airbus A350 are supposed to enable LCCs to finally make this market segment economically viable. Europe’s third largest LCC, Norwegian Air Shuttle, is the first European airline to try the low-cost long-haul model. It started long-haul flying in June with an interim lease of two Airbus A340s from Hi Fly. From August, the routes from its Oslo base and Stockholm to Bangkok and New York are to be served by the first two of eight Boeing 787-8s. The first was delivered from the factory in Everett, Washington, on June 29, and AIR International was on its ferry flight to Oslo.

Failures

Low-cost operations on intercontinental routes — for example, transatlantic services — have had a chequered history and been short-lived -booming initially before a sudden grounding. For example, between 1977 and 1982, pioneer Sir Freddie Laker ran his legendary ‘SkyTrain’ from the UK. This was followed by People Express from the US, which from 1983 to 1987 flew Boeing 747s filled to the brim with passengers across the pond to London and Brussels. Its customers even camped overnight in front of the sales offices to buy a ticket for the then unbelievably cheap fare of $149 one way.

More recent attempts at low-cost long-haul have been equally brief. Oasis Hong Kong, which flew 747-400s from the former British colony to London and Vancouver, didn’t even last two years. Even Air Asia X, the long-haul arm of the successful regional pan-Asian LCC Air Asia, based in Malaysia, had to abandon its brief venture into London and Paris in January 2012. It flew four-engined A340s and cited high taxes and fuel prices as well as a lack of demand as reasons for pulling out.

The most important underlying factor with all these failed carriers was the aircraft types involved. “The costs per seat-kilometre for the A340 are way too high to compete and you just can’t use the Boeing 747 for low-cost operations,» says Björn Kjos, CEO of Norwegian. “We wouldn’t dream of entering the low-cost long-haul market with those types of aircraft. Long-haul passengers should be flying at half of today’s costs and half of the ticket prices our competitors charge.»

The 67-year-old lawyer, novelist and former Royal Norwegian Air Force F-104 Starfighter pilot has become a kind of celebrity of the low-cost industry. But to limit the risk to his core business, Kjos has opted to operate intercontinental routes under a different air operator’s certificate, Norwegian Long Haul AS, and the designator DU (instead of DY at Norwegian Air Shuttle). And to circumvent what he calls a “stupid role unique to Norway» which prevents locally-registered aircraft operating from Norway with a non-Norwegian crew (the airline bases its crews in Bangkok and will employ mostly Asian cabin crews), the Boeing 787 fleet is registered in Ireland. He apparently couldn’t resist the irony in having an element of the Norwegian national code, LN, appear in the registrations, so the first aircraft flies as EI-LNA.

Game-changing Economics

Thanks to the new generation of aircraft, LCCs hope to overcome underlying problems that previously stymied the concept of cheap long-haul flying. Kjos is convinced that the 787s are a useful tool, enabling him for the first time to profitably offer cheap long-haul tickets. “The Dreamliner is really a game-changer because it’s faster, consumes 20% less fuel and costs 30% less in maintenance,» according to Kjos. And Tony Fernandes, CEO of Air Asia, has promised: “We will come back to Europe when we get the A350, starting in 2016.»

Unlike short hops, it is impossible to offer high frequencies on intercontinental flights.

But to be profitable, a long-haul jet must be kept in the air for almost 19 hours a day. “The 787 is actually the first aircraft you can operate like that, because it doesn’t have long maintenance periods,» says Kjos. “You need a pattern flying one long leg and one shorter leg. Typically we fly Bangkok-Oslo and then Oslo-New York in slightly more than 24 hours.»

Such operations were impossible with older aircraft, as Norwegian experienced itself when it had to rely on ageing A340s. “It cost us a fortune in fuel to fly the A340 compared to the 787,» Kjos says, “and the A340 needs a full 45 minutes longer to Bangkok than the Dreamliner.»

Norwegian squeezes 291 seats into the 787, 32 of which are in premium economy class where reclining seats have up to 48 inches (1.21m) in pitch, compared to 31 or 32 inches (780mm/810mm) in economy class. The cheapest round trips from Oslo to Bangkok can be booked from €394 (£340/$523). If a passenger wants to reserve a seat, check in one bag and get two meals and drinks, they can book a package costing €65 per leg. But with that, the total price doesn’t differ all that much from the cheapest offerings of network carriers. And those who don’t buy the package have to buy cold snacks and drinks only, with a little bag of nuts costing $5, a sandwich $10 and a beer $7. The passengers who bought the package are served warm meals and drinks first, with the rest of the customers being catered for later.

On the plus side, Norwegian’s 787s offer a brand-new Android-based in-flight entertainment system which not only takes the snack orders and plays films and music for free but also boasts interactive maps with interactive functions at the passengers fingertips, much like on a smartphone or tablet computer.

Scepticism

In general the industry is still a bit sceptical as to whether these new attempts at low-cost long-haul will work. “It’s the first time you’ll see a mid-size tube capable of flying long distances very efficiently,» says Henri Courpron, CEO of leasing market leader ILFC, from which Norwegian got their first 787. Four more will be leased, three bought. “It’s not a new business model; charter companies like Thomson have done it for years, but it’s not easy,» Courpron says. Ray Connor, CEO of Boeing’s Commercial Airplanes division, agrees: “The 787 is an enabler of this, but it’s a risky proposition and a lot of LCCs don’t want to change their business model.»

According to a recent poll of big International Air Transport Association (IATA) airlines’ CEOs, 32% believe that low-cost long-haul can work and 26% think the opposite.

The airline leaders are slightly more optimistic now compared to a year ago when 32% thought it couldn’t work out.

Ryanair CEO Michael O’Leary has, since 2007, been mulling over the idea of flying transatlantic with fares as low as €10 per leg without any extras. At the Paris airshow in June he said he would need 40 to 50 aircraft: “I would love to operate transatlantic flights with a company separate from Ryanair. But with the current backlog for long-haul aircraft I don’t see the opportunity for long haul.

The straight-talking Ryanair boss was surprisingly upbeat about Norwegian’s venture:

“I see every chance that it will work out for them out of Scandinavia, but I assume SAS will dump capacity on them on transatlantic routes.» But there might be a much bigger issue. Industry observers took note when, last spring, Lufthansa Chief Financial Officer Simone Menne floated the idea of the airline founding another low-cost arm, this time for long-haul routes to Asia to keep the competition from Gulf carriers at bay. In September a Lufthansa order is due for either Boeing 787s or A350s. Whichever type is chosen, Lufthansa is confident it will have the right aircraft to launch this demanding venture.

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