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Going the Distance

Published: 05/02/2014 - Filed under: Home » Archive » February 2014 » Special Reports »

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History has shown that flights lasting over eight hours are a “no go” area for low-cost carriers (LCCs). Air Asia X, Canada’s Zoom and Hong Kong’s Oasis all thought they had a magic formula, but all three failed. Now Scandinavian low-cost carrier Norwegian believes it has solved the problem of how to make long-haul flights viable.

Why haven’t LCCs in Europe and North America been able to make a success of long-haul routes? According to aviation consultant John Strickland, it’s simply because “there’s a lack of productivity when [they] fly long-haul.”

Such carriers make money on every sector they fly. So within Europe, an LCC might operate up to eight flights a day. That means it has eight opportunities a day to benefit from lower operating costs and the revenue from ancillary fees. 

But as Strickland points out: “When flying long-haul, a low-cost carrier incurs the same costs as everyone else. It can’t avoid paying for fuel and en route navigational charges. And when flying to Asia, an LCC will be lucky if it can fit in two sectors a day.” 

He adds: “It is true that an LCC could boost utilization by operating with one aircraft [as Air Asia X did when it first started flying to Europe], but then the scheduling will be erratic as that plane will need a certain amount of ‘downtime’ during the week for maintenance. So the business model [for long-haul] is not proven.”

There are further complications. On those long routes between Europe and Asia, there are many indirect carriers along the way who compete on price. They have different marketing objectives, and price keenly to encourage passengers to make an en route change.

Crucially, they provide passengers with many more departure possibilities. For example, when Air Asia X flew from Europe its passengers could depart only from London or Paris, while the indirect carriers could offer services to Kuala Lumpur from airports located the length and breadth of Europe.

But surely passengers would prefer to pay more for a direct or nonstop flight? Not necessarily. There is little loyalty at the budget end of the market; price is all-important.

So if an indirect traditional carrier can offer the convenience of your local airport, a nicer onboard product, free food and drink, free baggage handling and so on at the same price or less, then it will get the business, even with a longer journey time.

Adding Up the Costs

Nevertheless, Norwegian believes its new 787 Dreamliners will enable it to come out on top. Interviewed by industry publication in May, chief executive Bjorn Kjos said: “I think the A350 and 787 are the only ones you can fly low-cost long-haul because their operating costs are so much lower. We looked at older aircraft like the 767, A340 and A330 but the figures didn’t add up.” The A330 may be viable for short flights but not for Norwegian’s 11-hour Oslo-Bangkok service.

Kjos added that the A340 – the thirsty four-engined plane used by Air Asia X for its ill-fated European routes – “is way too expensive per seat kilometer to compete and you cannot run low-cost with the 747 (the plane used by Oasis). We wouldn’t even think about setting up with those types of aircraft.”

To this end, Norwegian is taking delivery of eight fuel-efficient 291-seat 787s to operate its long-haul flights. Not only that but it will keep costs down by taking the revolutionary step (for a European airline) of setting up a Bangkok base for 787 crew and plans two more abroad soon, in New York and Fort Lauderdale, FL. Basing staff overseas allows Norwegian to avoid paying prevailing Scandinavian wages and employee social security taxes.

Norwegian’s goal is to capitalize on growth it expects from Americans looking for cheaper flights to Europe and from Asians who want to make the US East Coast their leisure destination. 

Ryanair says it, too, is looking at flying trans-Atlantic. But Ryanair is talking about operating a sizeable fleet of 30 wide-bodied jets, which could take time to acquire. Chief executive Michael O’Leary is fond of striking deals with manufacturers, but fuel-efficient wide-bodies are in demand.

Will Ryanair succeed over the Atlantic where Canada’s Zoom failed? Possibly. Analysts expect it to shun big city airports and carve out a new market by operating from those regional points in Europe and Scandinavia not currently served by trans-Atlantic flights. Chosen airports would have good rail and road links, making them available to passengers within a wide catchment area. But Ryanair would have to price sharply, and there would only be limited opportunities for ancillary fees.

Why are low-cost trans-Atlantic flights a challenge when LCCs succeed on equivalent sector lengths between Southeast Asia and Australia? The marketplace is different – first, there is far less competition from traditional airlines when compared with trans-Atlantic routes. And, second, trans-Atlantic fares, especially from the UK, are inflated by taxes, fees and charges. It means the base fare (the price before the addition of the taxes, fees and charges) is quite low. The traditional carriers balance their books by charging high fares in the premium cabins.

A different price structure applies with flights linking Kuala Lumpur, Singapore and Australia. There’s a narrower price gap between the premium and economy cabins so not only is the coach fare higher when compared with a trans-Atlantic sector, but the taxes, fees and charges also form a smaller component. It means the base fare revenue per economy seat is higher.

Nevertheless, Norwegian stands a good chance of trans-Atlantic success because there are far fewer competitors out of Scandinavia. And, as Strickland points out, “the US market is easier for short-term development.”

“The US is less crowded,” agrees Ruediger Kiani Kress, aviation specialist at German business magazine Wirtschaftswoche.  “Asia is tougher because the Gulf and Asian carriers are fighting harder.”

As a result, Asia will be a different story. “The potential for Asia may develop,” Strickland says. “But the competitive challenge for Norwegian cannot be underestimated.”

By the time ancillary fees are considered, Norwegian is uncompetitive on price with indirect carriers. And when it comes to nonstop flights, it is a minnow in Scandinavia compared with Thai Airways.

Scandinavia is Thai’s most important single destination in Europe. It provides 77 percent of seat capacity (as against Norwegian’s 15 percent) between Scandinavia and Bangkok, according to Sydney-based consultancy CAPA. (The remaining 8 percent of seats would be provided by SAS, which will restart its Bangkok flights later this year.)

Carriers such as Emirates and Qatar Airways are expanding into Scandinavia, but Norwegian must be aware of the threat. Aviation specialist Patrick Edmond of Dublin-based e2consult says: “I can’t imagine Norwegian didn’t build Gulf carrier competition into its business case.”

Thai will defend its market share. It will price competitively through the travel trade and, as a further bonus, will upgrade premium economy passengers (this product is offered only on Scandinavian routes) to business class (fully-flat beds on newish 777-300ERs now rostered for all Scandinavian capitals), while passengers paying business class fares get pleasantly bumped up to first class.

In the early days, Norwegian showed naivete with Bangkok. It failed to realize that Asian passengers were not as clued in on the ways of LCCs as their Scandinavian counterparts. Asian travelers wondered why they were not offered what they considered the basics, namely a free blanket and a bottle of water. When offering to buy those items with cash, they discovered that Norwegian would only accept onboard payment by credit card. Credit card use among Asians is much lower than in Scandinavia, so some went without food and water on the long flights to Europe. Following complaints, Norwegian has amended its policies.

Rival Asian low-cost carriers such as Air Asia X and Scoot will be looking to see how Norwegian fares. If Norwegian does succeed with efficient 787s then it is likely they will head for Europe once they take delivery of 787s (in the case of Scoot) and A350s (Air Asia X).  

By Alex McWhirter

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