Face of Nation : There’s no doubt low-cost carriers have transformed air travel.
The competition with established airlines has lowered prices and provided a healthy balance sheet to those firms that can make the numbers work.
While Qantas, which is considered to be one of the world’s best-performing airlines, made a profit of $980 million last year, that was surpassed by the largest budget carriers.
Ireland’s Ryanair pocketed 1 billion euros ($A1.6 billion), actually a third down from the year before, while the granddaddy of low-coast carriers (LCCs), the US’ Southwest, added $US2.5 billion ($3.5 billion) to its bottom line.
Yet despite this success, and a seemingly winning formula, there’s one area many LCCs just can’t work out how to make money on: long-haul flights.
It means there is likely never to be a budget option on some of the most popular international routes from Australia — Sydney and Melbourne to London.
“Sadly, low-cost long haul is the graveyard of ambition for start-ups,” Ryanair chief operating officer Peter Bellew said last year.
“It consumes vast amounts of column inches in the newspapers because if people advertise these low fares it makes a big splash, but the economics don’t make sense,” he told Business Insider.
Exhibit A: Air France, which on Wednesday pulled the blinds down on its budget long-haul subsidiary Joon. Connecting Paris to less premium, more leisure-oriented destinations in the Caribbean and South Africa, it flew for a mere 18 months.
Exhibit B: German giant Lufthansa, which on Tuesday announced its low-cost offshoot Eurowings would bow out of long distance routes altogether to concentrate on European short hops.
It’s not just the low-cost long-haul subsidiaries of legacy carriers that are suffering. In March, Iceland’s WOWAir went bankrupt. It had tried to carve out a low cost niche linking North America to Europe via Reykjavik. It didn’t work.
Then there’s Norwegian, a pioneer of long-haul low cost that has sunk to a loss of 1454 kroner ($A244 million). In an effort to stem the bleeding, Norwegian has axed all its long-haul routes from Edinburgh and its London to Singapore offering, one of the world’s longest LCC services.
The problem isn’t with the passengers. They can’t get enough of LCCs, and many would willingly trade comfort for cheap fares, even on longer routes.
The issue is making money from air travel is notoriously difficult at the best of times. It doesn’t matter if you’re Emirates or EasyJet, getting a plane in the air is hugely expensive for any airline.
Planes cost a motza to buy or lease, there are unavoidable airport fees, fuel is a massive outlay and you can’t skimp on safety or maintenance.
Despite this, low-cost carriers have profited with two strategies. They have squeezed out every inch of savings they can by, for instance, turning planes around quicker on the tarmac so they can operate more flights in a day, prising more seats into the plane and paying crews less.
The advent of fuel-efficient planes, like the Boeing 787, also made long haul more viable.
Secondly, they have pushed ancillary costs onto the passenger by charging to pick those seats in advance, to take all but a minimum of baggage and to purchase food. As some have discovered to their shock, when you add in all those extras a full service airline can be cheaper.
But if any of these levers falters, the whole house of cards can come down. And long haul puts massive pressure on those levers.
“(Low-cost carriers) are supposed to operate much more efficiently than big network airlines like Lufthansa, passing on savings to customers,” said Brain Sumers of travel industry website Skift this week.
“That’s tough to do with flights over seven hours. On a flight that long, two of an airline’s biggest expenses are staff and fuel. Discounters may get an edge on crew costs, but they’re going to pay the same amount for fuel for the 11-hour flight from Los Angeles to London. It’s a huge chunk of the operating costs.”
Air France-KLM CEO Ben Smith, who axed Joon, agrees: “The (long-haul, low-cost) model hasn’t been proven, I’m not convinced yet,” he told Skift this month.
According to a 2013 report by consulting firm McKinsey, the further an LCC plane flies the less of a cost advantage it has over traditional airlines. Fuel can rise from 30 to 50 per cent of operating costs shrinking profit margins.
Budget carriers can try and squeeze in more seats – but major airlines are already doing that. The big players are also fighting back with not just more seats but basic bag-only economy fares
LCCs have another problem — a lack of high flying, big spending business class passengers. Their willingness to fork out for the front end of the plane can reap huge rewards for airlines and subsidise other costs.
The Official Airline Guide estimated British Airways’ London to New York route is the world’s most lucrative bringing in $US1 billion ($A1.4 billion) annually. Coming in second is Qantas’ Melbourne to Sydney shuttle that generates $1.2 billion.
In addition, long-haul flights — by their very nature — operate fewer times a day, they may have longer turnarounds and staff often have to be put up in hotels overnight.
Nonetheless, some LCCs have made long haul work — or they’re at least still persevering. Air Asia, Scoot and Qantas’ own Jetstar have been departing Australia for a limited number of far-off foreign climes for years.
Last year, Jetstar’s earnings before tax was $461 million. Qantas doesn’t factor out Jetstar’s international revenue, however, only saying it had “strong earnings”.
McKinsey says long haul LCCs have fared better in Asia as they have opened new markets or operated on leisure orientated routes.
The failure of some of its European contemporaries has been put down to their breakneck expansion.
Jetstar’s chief executive officer Gareth Evans has said it is unlikely the carrier will ever fly to Europe, with the current necessity for a refuelling stop encroaching into already tight profit margins.
Tony Fernandes of Air Asia backed this up. He told aviation publication Flight Global last year long haul low cost could work, but the dream of some, such as rock bottom fares from Asia Pacific to Europe, may never be a reality.
“Long-haul Europe is just not in our plans. We are pioneers in the long-haul, low-cost market, but the reality of the model is medium-haul routes of six to eight hours — that is the sweet spot.”
Canadian carriers, such as Air Canada’s Rouge and West Jet, have seen some success on longer routes. But their model offers some level of premium product to bring in higher paying customers as well as providing connections via their domestic hubs, in turn attracting more passengers.
But the real opportunity may be for existing legacy carriers by squeezing in more cheap seats and offering basic no-frills fares to Europe and over the Pacific.
That might just be the way to make long haul, cheap fares and expensive planes stack up financially.
“Many of the markets developed under the long-haul low-cost banner may prove sustainable, but the operating model seems likely to be lower cost rather than true low cost,” saidFlight Globa l’s Lewis Harper.
