Share this article
Heavily debated for its sustainability, the long-haul, low-cost (LHLC) model for airlines is a question that remains unanswered. Nearly every wave in the history of commercial aviation brings to the forefront another attempt to crack the LHLC business model.
The Covid era is no different — pressure on travel budgets, pent-up demand, fear of flying via major hubs, and high supply of used/unsold aircraft (Including new aircraft types like the A321LR) make this attempt more tempting and one to watch.
With the end and proceeding rebirth of the model in the Norwegian skies, JetBlue’s transatlantic operations expected to operate in “Mint” condition, startups like Moov and Ryan Air’s expected long-haul diversification, the coming years will see the best in the game trying to make LHLC successful across the Atlantic.
In the east Air Asia X with its restructure, and Scoot backed by SIA remain resilient. In the all-premium space, we have La Compagnie operating its niche business model.
Learning from the Past (We Go Way Back)
Interestingly the lessons & problems of the past remain very relevant even in 2021.
Almost all literature studying this model refers back to its pioneer, Freddie Laker and his SkyTrain. Launched on September 26, 1977, SkyTrain was the world’s first long-haul, low-cost carrier. It offered services between New Yorks JFK and London’s Gatwick airport.
Morell (2008) mentions all the important characteristics of the SkyTrain that have become key adaptations for low cost carriers today.
- High Density seating (Single Class): The SkyTrain configured its DC10 with 345 seats in an all economy cabin. At the time this was one of the only airlines to do so, especially on a long-haul international route. This is one of the key characteristics of low cost carriers today.
- Point-to-Point service: SkyTrain offered no connections at either end of the route. Another key aspect of today’s LCCs model. Many LHLC in the current environment however do offer low-cost connections as part of their model.
- Ancillary Revenue (No Frills) : The second major source of revenue for low-cost carriers today and a key differentiation with the traditional network carrier. LCCs not only generate ancillary revenue from charging for services like catering and baggage which would be available for free traditionally, they reduce important operational costs in relation to weight and turnaround times.
Laker’s SkyTrain failed to cope with the aggressive pricing of the network carriers and regulatory delays. Other factors like the economic climate at the time and exchange rate debts also contributed to the demise (Francis et al 2007).
Morell (2008) speaks about the failed experiment of People Express, which commenced operations in 1983. A different and more evolved model from SkyTrain, the airline offered low-cost connections at its base in Newark.
It also charged for baggage at a rate of $3 per bag, as a source of ancillary revenue. It did not survive because of poor management, over expansion and lack of finances.
"Common reasons of failure for the LHLC model have been cost of capital (Aircraft financing) and rising fuel prices, intense competition from network carriers, poor network planning and poor cost planning."
Oasis Hong Kong operated from Hong Kong to London Gatwick. The Oasis experiment looked viable initially. With an original plan to operate a high-density single class 747-400, it changed to operating the same aircraft in a two-class configuration (Morell 2008). One of the main reasons of failure was the non-availability of connections at either end of the route (JLS 2015).
There have been many other LHLC failures over time. Zoom, Flynas, and the latest being Norwegian. We have also had airlines attempt all premium LHLC, MAXjet Airways, Eos Airlines and SilverJet, to name a few.
Common reasons of failure for the LHLC model have been cost of capital (Aircraft financing) and rising fuel prices, intense competition from network carriers, poor network planning and poor cost planning.
Transferability of LCC Cost Models to LHLC
LCC carriers have been successful in reducing their cost base due to a combination of key factors like in-flight services, aircraft and crew utilization, seating configuration, use of secondary airports, digital & direct distribution and more.
While many of these cost benefits are not directly transferable to long haul, eg. LHLC carriers cannot gain significant cost advantages from fuel costs and aircraft utilization in comparison to traditional network carriers, some do remain.
It remains key for LHLC carriers to keep in-flight service costs at a minimum, operate from secondary and tier two/three airports & have a lean fleet plan.
Covid Impact
The impact of covid on the sustainability of the LHLC model remains to be seen. While on one hand demand for international travel has taken a severe hit, the cost of aircraft are expected to dip anywhere from 5-25%.
Tighter traveler budgets and pent-up demand in mature markets like the US & Europe could also be a boon for the model.
Different Type of LHLC Carriers and Low Cost Alliances
Even within the LHLC umbrella, there are different models that have been tried and tested over time. Some more successful than others. Evidence suggests that LHLC works better with partner carriers.
Two of the best examples are Scoot, part of the SIA group, and Air Asia X part of the larger Air Asia network. We then have standalone startups like Norwegian, Flynas, and WOW air.
"Evidence suggests that LHLC works better with partner carriers."
Partner airlines share the burden of certain costs and benefit from feeding other carriers in the common network operating from common hubs. Singapore Changi & Kuala Lumpur International are both great examples of how different airlines’ models can interconnect at these points.
Network consolidation is one way the LHLC model can compete with traditional network carriers and the big three alliances.
Alliance models like the Value Alliance in the far east provide an encouraging platform for low-cost carriers to compete with traditional network models and capture maximum share from the newly formed middle class in these regions.
Key Factors in Determining the Success of the Model
While it is hard to pin down exactly what is needed to make LHLC a success, some key themes are given below.
Aircraft Type: The choice of aircraft is key in determining the success of a LHLC plan. Airlines are usually torn between older aircraft types that burn more fuel, however, come at a cheaper price (Air Asia X’s choice of the A330) or newer aircraft models that cost more, however, provide more savings in fuel costs (Norwegian and Scoots’ choice of 787s).
As a result of network carriers being aggressive with pricing against new LHLC airlines, it is important to be in a cash rich position off the bat, cheaper aircraft like the A330 for Air Asia X at its start proved to be a success for this reason.
"Airlines are usually torn between older aircraft types that burn more fuel, however, come at a cheaper price or newer aircraft models that cost more, however, provide more savings in fuel costs."
A new reality is the single aisle long haul aircraft like the A321LR, which could potential solve both these issues, with a reasonable capacity to manage niche new routes. Narrow-body, long-range aircraft might be the missing piece of the LHLC puzzle.
Network: Partnerships and consolidated networks have proved to be necessary in order to compete with the big three alliances and traditional network carriers. While LHLC carriers focus on stimulating demand on certain niche flows, it is important to have a strong base of flows with beyond and behind connections that serve as cash cows.
Niche international routes would also be the latest to recover in a post-Covid world. Remaining adaptive and having seasonal schedules remains a key differentiating factor.
Ancillary Revenue: As with LCCs, the model calls for maximum focus on ancillary revenues. Traditional ancillaries like baggage, in-flight services like food and wi-fi along with newer innovative solutions in the space of on-board digital marketing.
The possible success of bigger ideas like the Air Asia “Mega App” combining travel with other services into a type of lifestyle is an exciting possibility in the near future.
Long-haul, low-cost carriers must not only achieve cost advantages, but also be competitive and protect themselves against network carriers cross-subsidizing low fares to be successful (Francis et al 2007).
It is important for LHLC carriers to generate feed at either end of the route to allow passengers more flexible options and increase load factors (Tony Fernandes, CAPA TV 2016).
"Long-haul, low-cost carriers must not only achieve cost advantages, but also be competitive and protect themselves against network carriers cross-subsidizing low fares to be successful."
Even though cost is a key consideration, it is important for LHLC carriers to increase RPKs either through their premium cabins or other revenue sources as that helps maintain competitiveness and profits.
A key factor always overlooked is that LHLC & LCC models need to maintain their “startup mindset,” it is the ability to change strategies, being adaptive and adjust to new market and consumer realities that is the key competitive advantage low-cost models have against network carriers, or as some would say “The Southwest way.”
Sources:
*Morrell, P. (2008) ‘Can long-haul low-cost airlines be successful?’, Research in Transportation Economics, 24(1), pp. 61–67. doi: 10.1016/j.retrec.2009.01.003.
*Francis, G., Dennis, N., Ison, S. and Humphreys, I. (2007) ‘The transferability of the low-cost model to long-haul airline operations’, Tourism Management, 28(2), pp. 391–398. doi: 10.1016/j.tourman.2006.04.014.
*Wensveen, J.G. and Leick, R. (2009) ‘The long-haul low-cost carrier: A unique business model’, Journal of Air Transport Management, 15(3), pp. 127–133. doi: 10.1016/j.jairtraman.2008.11.012.
*Bloomberg TV Malaysia (2016) AirAsia X returning to London soon: Fernandes. Available at: https://www.youtube.com/watch?v=UHUIyJr0oso
