Long-Haul, Low-Cost: Sizing Up Winners And Losers

by 
David Kaplan
Sunday, April 14, 2019
 • 
3
 min read

The big consumer question: How can I fly from New York to Paris for just $128 round-trip? The short answer is Long-Haul, Low-Cost airlines.  

However, to answer it from an airline economics perspective takes a bit longer.  

For larger airlines, the further you fly, the costs-per-seat advantage they have over a low cost carrier is diminished.  

On flights lasting longer than 3 hours, the value customers place on food and comfort also rises. Where the bigger airlines have less opportunity to make cuts that flyers expect, the Long-Haul, Low-Cost carriers have the advantage people are basing their decision to fly primarily on cheaper tickets.  

The established airlines have more at stake. Their network traffic and revenue streams are more dependent upon the longer flights. So there is greater incentive to be aggressive and add additional capacity on those long-haul routes to make up for individual price cuts. 

Fuel costs are a major factor for all airlines, but it’s especially true for the larger carriers. Anytime fuel spikes, longer flights are affected to a greater degree than airlines focusing on a short amount of routes and distances. If an airline is in a low-margin business, where it’s operating with low fares, any change and fluctuation in the upward direction of fuel pricing has a particularly sharp impact.  

All of those issues stack up to produce an environment where the Long-Haul, Low-Cost model struggles. And technology doesn’t appear to be a savior for that sector. As we’ve seen in just the last 12 months, two Long-Haul, Low-Cost carrier, WOW Air and Primera, went out of business. 

The future of Long-Haul, Low-Cost airlines is still playing out. But for carriers that have been able to manage their growth cautiously and have struck alliances such as Scoot’s participation in the Singapore Airlines Group, or Level, which is part of the International Airlines Group with British Airways, should be able to make it. While questions swirl around Norwegian Air’s ability to maneuver, the company has continued to surprise industry observers so far.  

What’s Next For Ancillaries?  

Aside from fuel prices, there's no question that non-ticket items and services – aka “ancillaries” – are one of the most crucial elements impacting airline profitability these days. However, while airlines can't control fuel prices, they do have the power to determine the cost of ancillaries. So a proactive approach is possible in this area. 

Making money from food services, baggage check-in, and even pre-boarding, wasn’t something that was considered 20 years ago, when all of the aforementioned costs were bundled into the ticket price, which was the main source of revenue.  

But now, we're at the point where certain low-cost carriers are generating an average of 35- to 40%, of their entire revenues from ancillaries. 

Global ancillary revenue for airlines was projected to reach $92.9 billion according to Nov. 2018 report by IdeaWorksCompany and CarTrawler. That figure represents a 312% increase from $22.6 billion in 2010.   

It’s reasonable to assume that if an ancillary, such as baggage fees, were somehow taken away, some airlines, even in big carriers in the U.S., would see the difference between being profitable and not being profitable. 

With the low-cost carrier revolution came the practice of unbundling products and services from the base ticket price. Their a la carte practices ultimate caused big carriers to realize. that they were missing out on significant amounts of revenue. That’s when baggage fees became normal. 

This apprach led to the current hybrid model, where there are three or four different types of fares to choose from. Some fares offer more goods and features – such as adding access to an on-demand ride-hail or car rental when you land. 

From a Revenue Management perspective, there is a great deal more that airlines can do to optimize ancillaries for the bundles and prices being presented to travelers. For one thing, we expect a reduction of the choices being offered, but an increase in ancillary revenue. Consumers find it confusing and consider it a hidden bait-and-switch to some extent.  

But by using more customization and personalization tools, airlines will start to promise clearer choices, which will still have quite a broad range of ancillary offerings included. 

The Uberization Of Premium 

In the not-so-distant past, to entice someone into becoming a “premium traveler,” all an airline had to do was take an economy passenger and offer additional services on top of priority check-in, lounge access, and a better meal.  

At some point, airlines realized there was an actual category of traveler that’s beyond the expensive end of business class.  There were people who want the full multi-course dining experience and the fully flat bed, as well as even more extras that they're willing to pay for. And voila, that was “premium economy.” 

We're likely to see future iterations of that. Offering bespoke products to specific audiences teaches you a lot more about who your customers are and what they're willing to pay for. 

Once an airline has the clearest understanding of a passenger’s willingness to pay for a deluxe experience, it is possible to craft something special that appears perfectly designed for the traveler who wants more than just a ride from point A to point B.  

You can imagine significant numbers of people paying to be in certain section of the economy cabin. What if you offered a section for parents traveling with young children – or, conversely, sections where small children are not allowed and the food menu is classified as fine dining? These passengers also might be offered a wine club membership with additional offers.  

Airlines should consider how the Uber model was transformed. At first, it was focused on a single kind of ride-hail for everyone (albeit, it started as a fairly premium service). But as it matured, the company rolled out as its Uber X for average ride-hails and made Uber Black its luxury option. Then came uberPool, which was intended for lower cost, short trips where riders would share the vehicle with other passengers going in a similar direction. That's an entirely possible scenario within the airline sector as well. 

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