Much of the nascent recovery in air travel is being driven by low-cost carriers (LCCs). Business travel is slow to return in most regions, and leisure demand is booming as travelers look for places to spend their long-accumulated vacation budgets.
Most available destinations are relatively close to home, so the comforts of long-haul flying aren’t needed.
It’s a perfect storm for LCCs, especially startups: idle aircraft and other aviation assets, combined with cheap capital, have lowered the barriers to entry for a wave of new competition – just as most legacy carriers have overstretched balance sheets and are struggling to breakeven.
Pre-pandemic incumbent LCCs are aiming for newer, larger aircraft while many of their start-up peers are taking advantage of a global surfeit of available used aircraft.
And a new long-range variant of the Airbus A321neo could enable a wave of new long-haul point-to-point routes.
Existing LCCs are Taking New Deliveries and Up-Gauging Future Orders
Airbus order book changes in recent months show a growing trend of LCCs like Spirit and Frontier substituting A319neo orders for A320neos, and the latter for A321neos (Boeing doesn’t break out its order book by subtype).
These carriers are aiming to reduce unit cost by adding incremental seats without a significant boost to trip cost, enabling them to compete even more ruthlessly against full-service carriers – and sometimes each other.
"These carriers are aiming to reduce unit cost by adding incremental seats without a significant boost to trip cost."
The larger A321neo comprises more than 47% of orders for Airbus’s A320neo family, whereas the previous-generation A321 accounted for just 22% of A320 family orders. This is reflective of a long-term and global up-gauging trend in single-aisle aircraft.
Recent Startups Generally Opting for Used Aircraft
A current example of surplus aircraft being re-deployed is at Australia’s Regional Express, or Rex.
The previously rural-to-city Saab 340 operator now leases 737s previously operated by Virgin Australia, which shed many of its leases in court-supervised bankruptcy administration last year. According to The Australian, Rex is leasing the 737s for just A$60,000 (US $46,300) per month for the first 12 months.
Until a recent multi-state COVID outbreak forced it to temporarily halt jet operations, Rex was flying key domestic routes including the lucrative “golden triangle” between Sydney, Melbourne, and Brisbane.
The upstart kept Virgin’s cabin configuration including its eight business-class seats. The airline is competing for small-business and government passengers, who offer higher yields than leisure passengers but are more price-sensitive than corporate accounts.
In the US, startups Avelo and Breeze have launched operations with 13-15 year old 737-800s and 7-14 year old E190s respectively.
Avelo is flying to a series of secondary and tertiary markets across western states, while Breeze is flying mostly short routes in the eastern and southern states.
Could the Tide Finally Turn for the Long-Haul LCC Model?
Long-haul travel will be particularly slow to return after the COVID crisis ends, as smaller and lower-income countries need longer to roll out vaccines and borders take time to reopen.
Although short-haul startups are already blooming in some regions, a slower return of long-haul traffic will likely delay most new long-haul competition until mid-decade.
The long-haul LCC model has never been successful, beginning with Laker Airways in the 1970s and continuing in numerous other flavors from Braniff to Norwegian.
It has historically worked only at smaller scale on high-traffic leisure markets, such as from Europe to the Caribbean.
A few prominent failures were caused by obviously flawed business models, like basing operations in the hubs of powerful, established legacy carriers. Some startups, like Primera Air and WOW Air, were also thinly capitalized, leaving them in poor position to survive early setbacks.
"New LCCs operating used twin-aisles can fly directly between smaller cities that previously worked only for large network carriers."
Perhaps the biggest criticism of the long-haul LCC model to date, most notably Norwegian Air Shuttle, was that LCCs generate much lower average fares while flying the same new-generation aircraft as their legacy competitors.
But the current economic cycle offers one key difference: enough spare A330s, 767s, and 777s to launch a dozen Norwegians.
Cheap aircraft and low-cost capital would materially reduce ownership cost and make breakeven much more achievable.
Although Boeing has long touted its 787 as the optimal aircraft to fragment long-haul markets, its economics can be matched by an eye-wateringly cheap used widebody if fuel prices remain relatively low.
New LCCs operating used twin-aisles can fly directly between smaller cities that previously worked only for large network carriers funneling large passenger volumes via a mega-hub like Dubai.
Long-Range Single-Aisles Could Deepen Competitive Disruption
One notable exception to this trend will be Airbus’s A321XLR, which will define a new niche in long-haul flying. Its size will allow it to penetrate markets too thin for widebodies but too long for current single-aisles.
The aircraft has racked up orders and commitments from nearly two dozen operators, including both legacy carriers like United and Qantas, and the Indigo Partners family of LCCs.
"One notable exception to this trend will be Airbus’s A321XLR, which will define a new niche in long-haul flying. Its size will allow it to penetrate markets too thin for widebodies but too long for current single-aisles."
The XLR seems certain to become the competitive weapon of choice across the Atlantic and within the Americas, with orders from three U.S. airlines, one in Europe, one in South America – plus Indigo, which controls carriers on all three continents.
Once the long-haul recovery finally begins, it will be led by leisure travelers, just like the rebound in short-haul traffic.
By avoiding routes served by largely empty wide-bodies and opening new point-to-point routes previously out of reach for narrowbodies, the A321XLR could significantly disrupt the medium-haul markets.