To those of a certain age, Freddie Laker’s Skytrain embodied the spirit of budget long-haul flying in the five years it operated from London to the US until its spectacular collapse in 1982.
Sir Freddie’s name won’t mean much to the average 20-something sat on a Norwegian Air Shuttle or Air Asia X flight engrossed in their iPad – even though the latter carrier named its first plane after the pioneer. Thirty-odd years on, and low-cost long-haul is back in fashion, but in a different world and manner from how Laker envisaged.
This summer, Norwegian became the latest to try transatlantic low-cost at Gatwick, offering New York, Los Angeles and Fort Lauderdale from the airport, aiming squarely at the leisure traveller, but, unlike Laker, with an eye on the premium customer as well. A new breed is emerging, with some, like Norwegian and Malaysia’s Air Asia X, growing from established budget short-haul carriers, while others are legacy carriers that have established their own offshoots – Singapore Airlines has Scoot, Qantas has Jetstar and now Lufthansa is setting up its own budget brand.
Learning from past mistakes
Laker was a trailblazer, and today’s airlines owe him a debt, not least because some have learned from his mistakes. He expanded too far, too fast, was undercapitalised – unlike, for example, Singapore Airlines – and, until the last days of his venture, ignored the budget-conscious premium traveller.
Laker’s target market was reluctant to travel in winter and his chosen aircraft, the DC-10, suffered from a perception that it was unsafe following a string of accidents. Crucially, the legacy carriers ganged up on him, pricing their economy seats at below cost in a fares war that would have only one loser.
Today’s breed of budget long-haul carriers do not have these handicaps, in particular the notion that other carriers can conspire to price against them. Thanks to Laker and years of litigation, this is now illegal in most developed markets, meaning that the runways are open to these new entrants.
Norwegian Air Shuttle has a predilection for illustrating the tailfins of its fleet with historical Nordic figures, so Laker was never going to get a name check here, but when the Roald Amundsen-branded flight first took off for New York it was a coup for Gatwick, which has been without this route since 2009, when British Airways axed a JFK service after only a year, citing a lack of premium traffic.
A year before, Zoom Airlines, another budget long-haul entry at Gatwick, was defeated by an oil price spike and that old favourite, undercapitalisation, after little over 12 months of flying to New York and Bermuda. Zoom was unfortunate in that its start coincided with crude oil’s peak at US$147 a barrel, compared to around US$100 now. Zoom was also using an aircraft, a Boeing 767 twinjet, that five years later, is regarded as old technology. Norwegian will be quick to point out that its factory-fresh Boeing 787’s carbon fibre construction means it has 20 per cent less fuel burn than the 767, giving an immediate advantage.
Norwegian’s 263-seat aircraft is a quantum leap from Laker’s three-engined 345-seater, which was a challenge to even half-fill in January. Norwegian boasted 90 per cent load factors this summer, but long-term, may still have a hard-sell on its hands despite its headline-grabbing £149 one-way fare to New York. An examination by one newspaper at Norwegian’s launch in July found just four £149 fares this year to March 2015 and with a £35 one-way price for the ‘extras’ – a 20kg baggage allowance, seat reservation and a meal, the total was little short of BA’s sale fare of around £400 return.
Business travellers will also be sceptical, chiefly because of Norwegian’s frequency, only three times a week to New York (one of those on a Saturday), compared with BA/American Airlines’ combined 13 departures a day. This scepticism is well founded, as a two-day delay for passengers returning from Los Angeles this summer proved.
However, price may swing it for some and Norwegian’s 32 premium seats look comfortable, with a 46-inch pitch (eight inches more space than BA) and fares that include food and hold baggage. As a rough guide, Norwegian’s premium flexible return fare for travel midweek to New York in mid-November, was £1,506 (searched in late July) compared to BA’s premium economy fare of £2,392. On the same dates, BA’s economy rate was £1,623 compared with £489 (meals and hold luggage included) on Norwegian.
These premium economy fares may appeal to small- to medium-sized enterprises, but would any buyer chance their employee missing their Thursday flight home on Norwegian and being stranded in a costly hotel until Saturday night? It seems unlikely.
Moreover, even the most budget-conscious buyer will probably bend towards full business class when it comes to getting staff home overnight and into the office the next morning. Norwegian is unable to say how its premium cabin is doing and, unsurprisingly, adds that the overwhelming number of passengers are leisure travellers. It is planning more long-haul routes, as its establishment of an Irish subsidiary provides it with EU traffic rights to Asia, Africa and South America from anywhere in Europe.
Labour pains
One trump card that Norwegian has tried to play is its labour costs, as many of its crews are based in Bangkok on contracts that would make a British Airways captain wince. Norwegian is all too aware of the rock-bottom rates that Asian carriers can pay, something that has dogged Europe’s airlines, whose pilots often command six-figure salaries via union agreements seemingly set in stone. Europe’s legacy carriers are still reeling from the blows dealt by Emirates and the other Middle East airlines – which also have relatively cheap labour costs.
And once Asia’s budget sector comes to Europe en masse with even cheaper employee rates – which it will do – legacy airlines are in real trouble if they cannot reduce their cost base.
This has not escaped Lufthansa, which plans to head them off at the pass. A joint venture with Turkish Airlines is being talked about, with seven wide-body aircraft to operate a subsidiary from late 2015. This off-shoot, which is tiny compared with the 151-strong Lufthansa long-haul fleet, is a weapon with which to bash the unions and to combat the Asian threat, with Bangkok thought to be among the first destinations, from Munich or another secondary German airport.
Lufthansa group chief executive Carsten Spohr announced his intentions in this area only a few weeks into his job, underlining the issue’s urgency. As he pointed out, other industries can move production to China, “but that’s harder for an airline”.
Spohr is adamant that the new venture will have a premium cabin to subsidise the cheapest economy fares, and believes a fresh new brand will take the company into markets where the Lufthansa name has little or no resonance.
Asia rising
Lufthansa is one of the first of the European airlines to break ranks, but Asia really is the region that will pick up Laker’s baton and run with it. A massive population with growing affluence and few preconceptions about what air travel should be like is a willing recipient of the low-cost model.
In its report, Generation X – Long-Haul Low-Cost Comes Of Age, airline guide OAG estimates that the ten ASEAN member states had 775 airline seats per 1,000 population last year compared with 3,200 seats in the US, meaning that capacity can quadruple and still only equal the US. The trigger for growth will be next year, when the ASEAN countries’ Single Aviation Market begins in an area whose member countries, if combined, would be the seventh largest economy on the planet, according to the Financial Times.
OAG’s other vital statistic shows how much of a potential appetite there is for this capacity. Within four hours’ flying from Kuala Lumpur, for example, lives a population of 616 million, approximately twice that of the US, while eight hours brings 3.4 billion into the equation – almost half the global population.
No wonder then, that Qantas and then Singapore Airlines were keen to get a toehold. Qantas did so with joint ventures beginning in Singapore in 2004 and moving on to Vietnam, Japan and, most recently, Jetstar Hong Kong, in which it and China Eastern Airlines each have a one-third stake (Shun Tak Holdings have the final third). The Qantas group will openly admit that its ailing mainline brand has been bailed out by the low-cost subsidiary in the last few years. So far, Jetstar has remained mainly short-haul, but with four Boeing 787s and a further seven on order, that will change.
Singapore Airlines’ Scoot, however, went long-haul from the start, promising “ultimately the world” in its route network. Gifted six Boeing 777s from its parent company in 2011, Scoot operates to 11 cities, including Sydney and Tokyo, both routes also operated by its parent. Later this year, the first of 20 Boeing 787s, originally intended for the mainline fleet, will be delivered to Scoot. Ten of these will carry 375 passengers, including 35 in Scoot’s premium seating, at 20 per cent less cost per seat than the 777s. These aircraft will replace all Scoot’s 777s by mid-2015, when some suspect it could start to target Europe.
The naysayers will point out that Air Asia X failed in its attempt to bring low-cost long-haul here, as did an ill-advised start-up venture, Oasis Hong Kong. Air Asia X was founded in 2007 as the long-haul arm of the highly successful short-haul airline, Air Asia, based at Kuala Lumpur’s 45-million capacity no-frills terminal.
The airline’s two-year attempt to crack London and Paris ended in spring 2012, blaming fuel costs and taxation. It used a four-engined aircraft, as did Oasis, which had little financial backing and made another error with very low utilisation and seat capacity, unlike Air Asia X.
Oasis has disappeared, but Air Asia is even stronger and intent on longhaul expansion. Part of this intent is the impetus provided by its premium cabin, which boasted an average 80 per cent load factor in the January-May period this year.
At this year’s Farnborough Air Show, Airbus unveiled a new engine version of the Airbus A330, which Air Asia X operates. The A330 Neo claims a 14 per cent fuel saving on the current version. Air Asia X was revealed as the launch customer, buying 50 for delivery from 2018. There is no doubt where some will head: “We need to come back to Europe and this aircraft is the right one for us to do it with,” said Tony Fernandes, the airline’s co-founder. His choice of destination will be key, as Saudi Arabia’s first budget carrier Flynas found to its cost this year. Its first venture into long-haul, begun at Gatwick in April, is successful, but its Jeddah-Manchester flight ceased after only three months, not that it will trouble the governmentbacked airline financially.
One other contender may be on the horizon: Shanghai’s Spring Airlines. It currently has around 40 narrow-body jets and concentrates on domestic routes, but is spreading its wings throughout Asia, including Singapore and Bangkok, and may get the taste for longer routes, particularly if it accepts a recent joint venture proposal from Air Asia.
Mission impossible?
Other Asian carriers may emerge into the long-haul arena, but none will bother Norwegian across the Atlantic – not even Ryanair.
For anyone waiting for a really true low-cost, all-economy transatlantic service, the skinflint kings have a shock for you: even they admit this formula won’t work – even with a batch of 787s.
As he prepares to step down from his role in December, Howard Millar, Ryanair’s chief financial officer, has eyes on his retirement project – a transatlantic budget carrier which will, he says emphatically, not take the classic O’Leary model.
He told the IrishIndependent: “I have done a number of business models on it and come to the inescapable conclusion that you can’t have a long-haul service without including some kind of business- or premium type package.” After 23 years with Ryanair, he should know, but even financial dunces can do the maths: Millar explained how he flew on a student charter from Ireland to New York in 1981, paying €380, a fare you can still get on occasions today. The difference is that oil then was US$10 a barrel, under a tenth of today’s price – something to ponder for those clamouring for low-cost long-haul, because as a legacy airline will sniffily tell you, in some ways, we’ve been enjoying it for decades.